Energy stocks have had it bad in 2020. The bottom literally fell out in April driven by U.S. oil prices that went negative. Oil producers were literally paying buyers as there were fears that the world would run out of storage capacity by May. In September, oil giant BP (NYSE:BP) said that it was likely that the world had passed ‘peak demand’ for oil and everything was going to be downhill from here on.
Oil and gas prices have been extremely volatile the whole year. However, the last two months of the year have seen crude oil prices stabilize and rise up to $44-$46 levels where they have been holding steady. In October, China’s domestic demand for jet fuel was almost back to pre-COVID levels.
As matters have improved for the energy sector, analysts have been keeping an eye out for some energy stocks that could break out in 2021 after the horrible year the industry has endured. Here are three stocks to analyze in this space.
Focussed On Oil
Chevron Corp (NYSE:CVX) is old school. While most large oil companies like Shell (LON:RDSa) and BP are talking about transitioning to renewable energy and going carbon neutral, Chevron has been relatively quiet about it. It invests in the renewable space but is not vocal about it. The fact is that Chevron is so good at making money off fossil fuels that it doesn’t see the need to talk about anything that focuses away from its core business.
The company offers a dividend yield of 5.53%, which is fantastic. In fact, Chevron raised its dividend payout from $1.19 per share per quarter to $1.29 in 2020 at a time when peers cut dividend payouts or suspended them entirely. Chevron sports the strongest balance sheet in the energy space with the lowest dividend break-even compared to BP, Royal Dutch Shell, Total and ExxonMobil (NYSE:XOM).
When the company reported its third-quarter results, analysts were expecting a loss of $0.27 per share but the company earned $0.11 per share leveraging its low cost of production. Revenue, however, fell 32% to $24.45 billion compared to expectations of $27.3 billion.
For 2021, Chevron announced an organic capital and exploratory spending program of $14 billion and lowered its longer-term guidance to $14 billion to $16 billion annually through 2025. Its previous capital expenditure guidance had been between $19 billion to $22 billion through 2025.
The stock is trading over 25% lower than its 52-week high. If world economies continue to recover and oil prices start rising, Chevron will move up. When you add the dividend payout to the stock, you could be sitting on a pretty tidy profit.
Crisis Breeds Opportunity
Pioneer Natural Resources (NYSE:PXD) is an independent oil and gas exploration and production company in the United States. When the crisis hit the energy sector, Pioneer rode on the strength of its incredibly robust balance sheet to acquire Parsley Energy (NYSE:PE) in an all-stock deal for $7.6 billion (including debt). Pioneer expects to drive annual synergies that will result in $325 million in operational and financial cost savings.
Pioneer is switching to a variable dividend payout model in 2022 to ensure it doesn’t have to slash dividends at any point in time. It currently pays a dividend yield of 1.85%.
Pioneer missed its EPS for the third quarter of 2020 by $0.08. It reported a free cash flow of $131 million for the same period. The net debt to book capitalization ratio at the end of Q3 2020 was 14%. The company has a strong balance sheet with a low leverage ratio enabling it to raise debt at a lower rate.
It recently issued 10-year notes yielding 1.9% to raise $1.1 billion. This will clear the existing debt of $139 million of 3.45% due in 2021 and $244 million of 3.95% due in 2022.
The stock is currently trading at $114.97, almost 40% lower than its 52-week high. Analysts have given it a target of $128.07. However, if oil prices keep moving up, it is not unreasonable to expect Pioneer to cross that figure with ease.
Midstream Giant
Enterprise Products Partners (NYSE:EPD) is a bellwether in the midstream space. It is not affected a lot by oil prices given that its business is to transport oil and gas from production companies to refineries. It is one of the largest midstream companies in North America and it has a super-strong moat. It is very difficult to find a substitute to replace its network of pipelines and transportation facilities on the continent.
Enterprise has a monster dividend yield of 8.33%. It has consistently increased its dividend payout over the last 20 years with a CAGR of around 6%. However, it didn’t increase dividends in 2020. Investors are concerned that this might indicate a problem with respect to the company’s future.
However, we would say that it is a smart decision to not increase dividends when its main customers are going through a very tough period. It is in fact a great opportunity to accumulate shares at this low price.
The company’s average return on capital for the last 10 years has been 12%. Even though the company’s revenue was lower by 12% in the third quarter of 2020 compared to the same period in 2019, Enterprise did a very good job of cutting costs. The gross operating margin didn’t fall to a great extent and was almost $2 billion for the period.
The stock is currently trading at $21.5, and analysts have given it a target of $24.75. That’s an upside of 15%. When you add in the dividend payout, you are looking at a return of almost 24%. As the economic recovery gathers pace across the world in the second half of 2021, oil prices might move higher that should lead to even more capital appreciation on this stock.