After oil hit multidecade lows, with the futures even making a rare technical “negative price” move around a futures roll date, there was a major scare that most of the smaller and more leveraged oil and gas exploration and production and the services companies would shrink into oblivion. Now that oil is back above $30 per barrel, suddenly there is some relief. Many investors had begun avoiding oil and gas stocks due to their direct exposure to and role in fossil fuels, but another group of investors is still looking for the companies that can survive as things are for the next decade or longer.
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24/7 Wall St. has maintained a strong degree of skepticism about the oil and gas sector. After all, private endowments, pension funds and even some of the world’s top financial managers and advisory companies have pledged not to invest in but to move away from fossil fuels where they can. Some investors simply would not buy oil-related companies if they were given an opportunity to invest in them at one-third of the price.
The expected recovery of the economy and the depressed prices that had been seen during the panic selling in March has created a field for long-term investors to look out to without such a near-term focus. As the summer of 2020 kicks off, the trillions of dollars in stimulus and stabilization funds, as well as the zero-percent interest rates and other quantitative easing measures, have all acted to begin a stabilization of the economy.
It is important to consider that the panic-selling lows from March now appear to be a gross overreaction. That does not imply that the gains made since will only be followed by more gains. In fact, many of these oil stocks may remain somewhat muted. Some may even see their shares flounder without ever recapturing their highs.
Click here to see the 10 U.S. oil companies most likely to be still thriving in 2030.
The next Great Depression no longer seems to be on the table. In looking long term rather than short term, one driving force to normalization is that President Donald Trump has vowed to keep the economy open even if there is another spike in COVID-19 cases. For better or worse, people were going back out and driving and heading to stores and restaurants. The civil unrest is not expected to remain a long-term issue. Even airline ticket demand, housing demand and interest in cars have all started to tick back up from crush-depth lows.
There are of course some risks to crude oil prices near term. Any of these could yet again catapult all the oil and gas stocks back into panic mode. These risks would include a major growth rate in COVID-19 coming back, Russia and Saudi Arabia could decide to rattle the chains again, and an economic cold war with China and the United States could hurt. There are also 2020 election risks, which will follow up as election risks in the coming years.
When looking beyond the near-term issues, some secular trends have to be considered out to 2020. The move toward vehicle electrification is going to continue to grow rather than contract. Companies and industries will keep pressuring the fossil fuel industry. Regulation efforts toward fossil fuels also will continue around the globe, with or without the United States. The pressure to move to alternatives in the environmental, social, governance (ESG) theme should only continue. The climate change and global warming debate likely isn’t going anywhere. Furthermore, including 2020, there will be three U.S. presidential elections between now and 2030. If history repeats, we are likely to see yet another recession by the time 2030 has rolled around.
After adding these near-term and long-term issues together, there still almost certainly will be oil and gas companies in the year 2030. Even if the majors make more efforts into alternatives and biofuels, the reality is that there are just too many economies dependent upon oil and gas, with no alternatives to imagine that oil will be dead. The same is even likely in 2040 and beyond. The secular trends are obviously not favorable to most fossil fuel companies, but history and reality are likely to favor the strongest companies with the best balance sheets and management teams.
24/7 Wall St. looked long and hard to screen for 10 U.S.-based oil and gas stocks that almost certainly still will be operating in 2030. If the rest of the sector flops or flounders, these companies may even be thriving. That said, there should be no interpretation that all these stocks will rise dramatically over the next decade. Some may have even made very opportunistic acquisitions in bankruptcy or other highly distressed situations, and perhaps some will pursue more biofuels and other alternatives in their mix.
It is easier to write off entire industries and their major companies in theory than it is in practice. To prove the point, travel back in time to the year 2000, when the smoking trends were already in secular decline. Would anyone have believed that the top three tobacco stocks that trade on the New York Stock Exchange would still have a combined $275 billion in market capitalization in 2020?
Many of the energy sector’s stocks have recovered 50%, or much more, since the lows in March or April. That means some could face headwinds, profit-taking or missteps that could hurt the shares. These stocks have been listed alphabetically to avoid any ranking. Here are 10 of the larger U.S. companies tied to oil and gas that are likely to still exist and even thrive in 2030.
24/7 Wall St.Baker Hughes
Baker Hughes Co. (NYSE: BKR) is on the journey to recapture its post-GE independence, and the company is a leader in its field, with more than $20 billion in annual revenues. The oil and gas services player declared its regular dividend in May, and it still has roughly a 4.2% dividend yield. The company is integrated in the services and equipment sector in energy, and, for better or worse, it can get through most periods of extreme oil weakness due to its ability to furlough workers during hard times.
Capital spending also can be tempered in hard times. The U.S. rig count has continued to shrink in 2020, and that can be inferred as low production in the upcoming months. The company also has targeted keeping a $3 billion cash level, along with positive cash flow and free cash flow.
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Cabot Oil & Gas
Cabot Oil & Gas Corp. (NYSE: COG) is a pure-play oil and gas producer in the Marcellus Shale in northeast Pennsylvania, and the company uses its own horizontal drilling that has seen a rise in production and reserve growth over time. The company claims to have 173,000 net acres in the dry gas window and to have drilled nearly 800 net horizontal wells in its 10 years there. Cabot has plans to add net horizontal wells and its reserves include 12.9 trillion cubic feet of gas and a hedged portfolio. It has more concentration in operations than others.
Analysts expect Cabot to remain profitable in 2020 and then return to growth in 2021. None of the analysts expects it to lose money, and its 2% dividend yield actually looks safe. With a total of $3.2 billion as a borrowing base, the $200 million in cash and $1.5 billion credit facility leaves $1.7 billion in liquidity. With an $8 billion market cap, Cabot has tended to be less volatile than other oil and gas stocks.
Chevron
Chevron Corp. (NYSE: CVX) is the number-two domestic integrated player behind Exxon, but now with close to 10% of a size differential. Chevron also has a high 5.5% dividend yield, but the investment community has touted for some time that Chevron has a less stressed balance sheet than Exxon. On top of its major operations in the West Coast, the Permian, Gulf of Mexico, the Appalachian Basin, mid-continental United States, infrastructure and renewables, Chevron’s global footprint extends to at least 25 other country-specific operations.
Chevron is rated as Aa2 at Moody’s, and its AA rating at S&P was on Negative watch. At $94.00 a share, it has a market cap of $175 billion, and the 52-week trading range is $51.60 to $127.00. Chevron has pledged to keep its dividend, but one day it also may have to consider a lower payout, along with lower capital spending, cost cuts, using new technologies and so on, while it keeps a firm grasp on its capital.
Concho Resources
Concho Resources Inc. (NYSE: CXO) was still listed as investment grade and one of the top Permian Basin producers. It has a large drilling inventory that is targeted around oil, and it actively hedges production to keep a profitable operating structure. With an $11 billion market cap, it has a dividend yield of 1.4%.
Concho is expected to remain profitable in a weak pricing environment. The company generally targets lower leverage and keeping capital spending levels within reach of cash flows. Concho lost about 60% of its value from the start of 2020 through mid-March, and the company has taken a large $12 billion charge and cut its capital spending targets.
ConocoPhillips
ConocoPhillips (NYSE: COP) is a key player in exploration and production in North America, Europe, Asia, North Africa, the Middle East and elsewhere, with multiple targets in oil and gas using conventional and unconventional plays. The company has a large global scale that is deemed to be more weighted to oil with a low-cost structure, above-peer margins and free cash flow. It has even been said to have a lower portfolio decline rate, and it saw significant debt reduction in recent years.
ConocoPhillips had 5.3 billion barrels of proven reserves in crude oil at the end of 2019, with about 1.35 million daily barrels of production. Moody’s had an A3 rating late in 2019 but noted in April that ultra-low oil prices will hurt earnings and cut its large cash balance. Fitch Ratings had an A rating as of late 2019. At $44.50 per share, ConocoPhillips is worth $48 billion, and its 52-week trading range is $20.84 to $67.13. The dividend yield is about 3.8%.
Enterprise Products
Enterprise Products Partners L.P. (NYSE: EPD) is the de facto king of oil and gas infrastructure, and it is highly diversified. The master limited partnership (MLP) model is supposed to act as a buffer to energy prices themselves and act more like a “toll road” model, but the reality is that when the oil industry heads south it hits the MLPs as well. It takes pipelines and infrastructure assets for any energy products to be moved around the nation. The good news is that Enterprise has many thousands of miles of those pipelines for crude, gas and refined products.
Enterprise also owns and operates key infrastructure and processing facilities and other forms of shipping and transportation. Because its units were still under $20, the distribution comes with a yield equivalent of about 9%, although that is quite high versus historical yields, considering its size and being a best-in-class leader in MLPs. The company is known for keeping a relatively conservative financial leverage relative to peers, but in the current climate “relative” matters more than ever.
EOG Resources
EOG Resources Inc. (NYSE: EOG) recently decided to maintain its dividend payout, but its yield is under 3% and not so stretched that the company has to balk here. In May of 2020, EOG took out another $1 billion or so in capital spending plans that effectively halved its original 2020 spending expectations. The company also is looking to save another 8% in well-cost savings. To prove how hard times were, note that its first-quarter 2020 net income of $10 million was just or $0.02 per share, versus $635 million or $1.10 per share a year earlier.
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EOG’s adjusted income for the same period was $318 million, or $0.55 per share, compared with $689 million and $1.19 per share a year earlier. EOG has been focused on improving its cost structure, focusing on disciplined and higher-return investments and targeting free cash flows, all while looking to strengthen its own balance sheet. EOG’s rating at Moody’s at the end of 2019 was A3. At $52.75 a share, it has a market cap just above $30 billion, and its 52-week trading range is $27.00 to $95.29.
Exxon Mobil
Exxon Mobil Corp. (NYSE: XOM) still has problems and is still trying to right-size (or right-position) its portfolio of large oil. The biggest bet is Guyana at this time, and that oil will be cheap to produce (estimated well under $40 per barrel) and it will continue in the Permian while it sells other assets. Exxon probably needs to have a reality check about the pressure of maintaining its high dividend (over 7% yield now), as so many companies have cut dividends or scrapped them, and it is still selling some assets.
The company may never be what it was in the last decade, even after a record $41 billion natural gas acquisition of XTO Energy, but the company has the means to survive if it operates prudently and keeps looking for cost cuts and using new technologies, and if it keeps a tight grip on its treasury assets. S&P changed its rating to AA from AA+ in March of 2020, followed by a Moody’s downgrade in April of 2020 to Aa1 from Aaa. At $46.25 a share, Exxon has a $196 billion market cap, and shares have traded in a $30.11 to $77.93 range over the past 52 weeks.
Pioneer
Pioneer Natural Resources Co. (NYSE: PXD) recently launched a $1.15 billion convertible senior note offering with an implied strike price of $109.77 per common share, and it came with a mere 0.25% coupon and a 30% price premium at that time. Pioneer now has slashed its 2020 capital budget by a total of 55% from its original 2020 budget expectations, along with corporate cost cuts, lower production costs and salary reductions. It remains to be seen whether Pioneer’s $100 million in cash flow from the first quarter of 2020 can remain at these lower prices.
Pioneer has a Baa2 senior unsecured rating at Moody’s that is based on its large acreage and reserve base in the Permian Basin and with a low-cost and oil-focused production. The company’s solid cash margins and efficient capital investment underpin competitive capital returns. Pioneer’s growth spending has moderated as the company has increased its emphasis on returning capital to shareholders. Fitch Ratings issued a BBB unsecured rating on Pioneer in May, and late in 2019, Moody’s had a Baa2 unsecured rating.
At $94.25 per share, it has a $15.5 billion market cap, and its 52-week trading range is $48.62 to $159.01. Pioneer’s dividend yield of 2.3% also has not raised red flags, even if that payout had been raised recently.
24/7 Wall St.Valero
Valero Energy Corp. (NYSE: VLO) has nearly doubled from its dog days in March, but its stock is still down handily from its highs. There are times when low energy prices are good for refiners, but after earning $5.00 per share in 2019, the refining player is expected to lose over $1.00 per share in 2020. The analyst community sees earnings returning to $4.00 per share in 2021, but that assumes less wild swings. Valero’s dividend is $3.92 per share on an annualized basis, and there may be a debate about what a normalized dividend would be.
With a $28 billion market cap, it had revenues over $100 billion in 2019 and 2018, and the majority of its assets are in its refineries and physical infrastructure locations. As of the end of 2019, Valero’s 15 petroleum refineries had a combined capacity of about 3.15 million barrels per day, without tallying up ethanol facilities, and it sells gasoline and products into 7,000 outlets under multiple names. The reality is that the electrification of cars comes with a risk, but Valero deals internationally and it has many assets that can be used to provide a buffer that protects its viability in challenging outlook.
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