It’s helpful to reflect on history and learn from it. So that next time when a similar situation occurs, investors can be better equipped to make a more suitable decision for their own portfolios.
Here’s what I learned from the 2014 oil downturn.
It has been a difficult time for investors who invested in energy stocks right before the WTI oil price fell from over US$100 to as low as US$30 and stabilizing in the US$50 range.
Large Integrated Energy Companies
Exxon Mobil Corporation (NYSE:XOM) fell about 27% from US$100 in 2014 to the 2015 low of US$73. Buying in the low would have pocketed you a 23% gain by now while receiving a 4% dividend yield.
The company also stayed on schedule to raise its dividend. Even though it was only a raise of 2.7%, it still showed Exxon’s commitment to its dividend increases. It also was a proof that it had a stronger balance sheet, as other energy companies froze or even cut their dividends.
In early April, Morningstar lowered Exxon Mobil’s economic moat rating from Wide to Narrow due to low commodity prices, which are having an impact on the highest-quality integrated firm. Imagine the impact they’re having on other commodity price sensitive energy companies.
After the oil price plummet, you may be looking to invest in the top energy stocks. I compared the recent business performance of 9 oil & gas integrated companies and 7 midstream companies, respectively. I focused my analysis on profitability and debt because those factors determine whether an energy stock will survive or even thrive in a prolonged low oil price environment.
The oil & gas integrated companies analyzed include Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX), and Suncor Energy (TSX:SU)(NYSE:SU), and the midstream companies analyzed include Kinder Morgan Inc (NYSE:KMI), Magellan Midstream Partners, L.P. (NYSE:MMP), and Enbridge Inc. Which are the safest energy stocks for long-term investing?
Safest Integrated Oil & Gas Stocks
From the integrated oil & gas stocks, Suncor Energy is a winner. It has low cost of operations, high operating margins, as well as a culture to increase dividends. Exxon Mobil and Chevron are also winners because they have relatively high operating margins and low debt levels that can only benefit them in the low oil price environment. Read More
The oil majors’ P/E are so volatile that it should be used in evaluating the valuation of the oil majors with a grain of salt.
On the other hand, their book values per share are much more stable and so the P/B maybe a better metric to use.
The yield compared to historical yields may also be an indicator. High yield may imply good value.
After determining a dividend is safe, we just need to buy it on price dips.
And a price dip is happening right now. So, if the yield is attractive enough for you, consider easing into Exxon Mobil and or Chevron.
P/E is one of the first metrics that investors typically use to determine if a company is overvalued, fairly valued, or undervalued. However, I suspect that the P/E cannot be viewed the same way for oil majors.
Initially, I subconsciously observed that it’s a good time to buy oil majors when their P/Es are high relative to their historical P/Es. But looking at real data, it’s not as simple as that.
I looked at the P/E, P/B, price range, and yields of the past 10 years for Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX), and BP plc (NYSE:BP). From looking at these data, I strive to derive some conclusion from my observations.