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.
Managing your own stock portfolio is not easy. One of the many important decisions is choosing between quality and returns. Is there a cost in investing in high-quality shares? Could buying them lead to lower returns?
There’s no simple answer. However, your rate of return on a stock depends largely on the valuation you paid and the growth rate of the company. Besides, there are other considerations outside of aiming for high returns.
Let’s explore the answers with examples, including Microsoft Corporation (NASDAQ:MSFT), The Coca-Cola Co (NYSE:KO).
Quality companies tend to trade at premiums
Some say you can get quality and returns too. The rationale being that when you buy quality companies, their steadily rising earnings will lead to steadily rising share prices. However, if you overpay for them, the expected returns will likely be unsatisfactory. Read More
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