3 Energy Names To Add To Your Portfolio
Energy is a crucial sector, but despite its widespread applications, the segment has underperformed the market and is down by around 5% over the past year. A reason for the recent underperformance has been volatile oil prices in Q4 of last year.
However, oil prices are now at a healthy level, and with fears of a recession abating should continue to trade in a constructive range, or could possibly even melt-up gradually from here. Therefore, the oil/energy names could outperform going forward, and certain stocks should be incorporated into a well-diversified portfolio.
Why Oil Could Be Headed Higher From Here
Perhaps the number one element that affects the trajectory of energy stocks is the price of oil, and oil has had an extremely constructive recovery since the scare of late 2018. As fears of a possible recession gripped markets, oil had one of its worst spills in recent years, declining by approximately 44% in under 3 months.
We see now that fears were drastically overblown, and prices got compressed to irrationally low levels. Since the oil bottom in late 2018, crude oil has appreciated by roughly 46%, yet energy names in general have underperformed the market substantially over the last year (SPX up 8%, energy segment down 5%), and many valuations remain depressed.
In addition to reduced recession fears, the economy is seemingly quite strong in the U.S., as well as in many other major areas of the world. In fact, oil demand is projected to rise this year, from 1.3 million barrels per day in 2018 to 1.4 million barrels per day in 2019.
In addition, major oil producers like Russia and OPEC plan to keep supply relatively constrained throughout 2019, as their deal to continue with supply cuts remains in place. Thus, we have a global economy that will likely require an additional 100,000 bpd this year, and some of the world’s greatest oil producers are keeping supply artificially low. This is naturally a bullish dynamic for oil prices.
Also, it is important to note that global oil producing powers like Russia, Saudi Arabia, and others are heavily dependent on relatively high oil prices, preferably around $70-$80 or higher. Their economies, national pride. and essentially the countries’ social fabric is at stake. Therefore, we will likely see continued cooperation between OPEC and Russia to keep oil supply artificially low in the future.
Three Names To Consider For Your Energy Portfolio
1. BP p.l.c. (BP) with nearly $300 billion in revenues last year is one of the largest energy companies in the world. Its operations are vast, wide ranging, and span across much of the globe, including the U.S., the U.K., and Russia through BP’s Rosneft operations. BP is currently trading at about 11.6 times trailing earnings, and is expected to deliver $4.12 (consensus estimate) in EPS in 2020.
This implies BP is trading at just 10.8 times forward earnings. Additionally, BP has demonstrated a propensity for surpassing EPS estimates in recent reports. In fact, over the past year, BP has beat quarterly estimates by an average of more than 20%.
This trend could continue, and BP could report even higher EPS numbers than analysts forecast, thus putting an even lower forward multiple on the stock. In fact, if we look at 2020 estimates, we see that higher-end figures point to possible EPS of $6.20, about 50% above consensus figures.
However, if we apply just a 20% premium to 2020’s consensus estimates (in line with past year’s beats), we arrive at possible EPS of roughly $4.95. If BP can achieve this level of EPS, the stock is currently trading at just an 8.9 forward multiple. Earnings could potentially come in even higher if the price of oil advances to $75 or above next year. In addition, BP pays one of the best dividends out of any major energy company, roughly 5.6%.
The technical image also looks quite compelling, as BP appears set on breaking out of a long-term trading range. Prices have bumped up against $46 resistance several times over the past year, and the upcoming attempt may enable the stock to break through this multi-year resistance level.
2. Valero Energy (VLO) is a large-scale refiner, as well as an ethanol producer in the U.S. Canada, U.K. and internationally. The company produces massive revenues, and trades at only about 0.33 times sales. Valero is also extremely cheap on an EPS basis, as the company is trading at just 11.9 trailing earnings. Furthermore, VLO is expected to deliver $11.28 in EPS next year (consensus estimates), which puts the company’s forward multiple at a remarkably low 7.8.
Valero is very cheap any way you look at it, and the company is also well known for crushing estimates. Just in the last year, VLO has beat consensus EPS estimates by an average of over 30% per quarter.
The company looks very undervalued right now, despite analysts being relatively bullish on the stock. There are 8 strong buy ratings, 2 buys, and 6 holds on the stock right now. Moreover, VLO is currently trading below even the low-end of analysts’ 12-month price target range.
The stock is at $88 right now, the lower-end range is $93, consensus estimates are for $103, and higher end estimates go up to $135. This implies the stock would have to appreciate by 6% to get to its lower end target, by 17% to get to consensus estimates, and by over 53% to get to the higher end price target figures. Valero also offers a very nice dividend of 4.24%.
Valero's technical image also looks quite strong as the stock appears to have entered a new uptrend post the late 2018 declines. We can look forward to the 50-day MA going above the 200-day MA in the near future, marking a very constructive technical pattern.
3. Gazprom (OTCPK:OGZPY) is a Russian energy giant often seen as one of the most powerful and dominant companies in the world. In fact, Gazprom was recently named the most powerful energy company in the world, dethroning the mighty Exxon Mobil (XOM).
However, despite the company’s unrivaled influence in its region, and its remarkable profitability, Gazprom is still extremely cheap. Since we mentioned Exxon earlier, let us also mention the fact that Exxon currently trades at a trailing P/E ratio of around 16.64.
What does Gazprom trade at? Gazprom trades at a trailing P/E of around 2.94. Why so cheap you ask? It is largely because Gazprom is a Russian company, and it is majority owned by the Russian government.
However, being controlled by the government in Russia isn’t necessarily a bad thing, as it provides numerous strategic advantages, and takes much of the “political risk” out of the equation. Other industry leaders in Russia like Sberbank (OTCPK:SBRCY) have similar ownership structures, but this doesn’t prevent them from being great companies, and offering great returns to investors. It is also worth noting that around 25% of the company’s shares are owned by foreign investors through ADRs.
The bottom line is that it is not just Gazprom; Russian stocks in general are still very cheap. In fact, if we look at CAPE ratios around the world we see that Russia is the only major economy with a CAPE ratio in the single digits, just 7.86.
This essentially means that Russian stocks are amongst the cheapest in the world right now, but the ratio has been rising slightly in recent years and is likely to expand further as demand picks up for Russian companies in the future.
Another factor to consider about Russia is that their economy recently went through a recession and is now showing healthy growth of well over 2%. Market participants may be surprised by how much Russian equities could possibly outperform in the future, and a great place to be is in Gazprom, a dominant industry leader, trading at under 3 times earnings, and delivering a very healthy dividend of over 5%.
We see that Gazprom has been largely range-bound throughout the last year, but this stock will also likely make a breakout as the price of oil progresses higher and possible multiple expansion continues in Russian shares.
The Bottom Line
Energy names have been out of favor recently, but as oil regains its momentum, stocks in this sector could begin to outperform going forward. The three companies I’ve brought to your attention are well positioned in their respective markets, are relatively inexpensive, have strong potential to grow EPS, and could move substantially higher, especially if oil resumes its uptrend from here.
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Disclosure: I am/we are long BP, OGZPY, VLO, XOM, SBRCY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article expresses solely my opinions, is produced for informational purposes only and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please consider consulting a professional before putting any capital at risk.