Zacks Industry Outlook Highlights: Helmerich & Payne, Exxon Mobil, Spectra Energy Partners, Magellan Midstream Partners and Boardwalk Pipeline Partners
Zacks Equity Research
Updated
For Immediate Release
Chicago, IL – April 29, 2016 – Today, Zacks Equity Research discusses the Oil & Gas, (Part 2), including Helmerich & Payne Inc. (HP), Exxon Mobil Corp. (XOM), Spectra Energy Partners L.P. (SEP), Magellan Midstream Partners L.P. (MMP) and Boardwalk Pipeline Partners L.P. (BWP).
Going by the past year’s track record of oil prices, the term ‘energy stock’ probably conjures an image of a sharp fall in share prices and investment dollars going down the drain. However, that isn't necessarily the case – there are a number of companies that are primed to outperform.
While record high inventories and robust production could still push the commodity to the depths of multiyear lows, signs are emerging that oil prices are likely to stabilize and gradually pick up. Not only is global demand expanding but energy companies have significantly scaled back on plans to explore for and bring out more oil. This should lead to lower future production and supply/demand rebalancing.
Nevertheless, one needs to have an appetite for risk in order to invest in the energy sector. For savvy investors though, there are opportunities to earn big returns.
Invest in Companies with Little Debt
It seems there is no end to the oil industry’s woes. The number of defaults is mounting for the beleaguered sector and the latest victim of this trend is domestic oil and gas explorer Energy XXI Ltd. . Last week, it filed for chapter 11 bankruptcy, which will erase a substantial amount for its investors.
Several others are lined up for a similar fate. In fact, Moody’s has rated 1 in every four oil and gas producer at B3 or lower, which emphasizes their junk status.
However, some energy companies may still have the ability to withstand falling prices for a long period. These entities have restructured costs or taken other measures to deal with the prevailing situation. In this event, it may be a good idea to look at energy companies that have low debt capital ratios, which make debt servicing relatively easier for them.
We advocate large-cap companies like Helmerich & Payne Inc. (HP).
Integrated Majors to Benefit from Size and Diversification
In this current turbulent market environment, we advocate the relatively low-risk energy conglomerate business structures of the large-cap integrateds, with their fortress-like balance sheets, ample free cash flows even in a low oil price environment and steady dividends.
Thanks to their integrated structures, companies like Exxon Mobil Corp. ( XOM) have been able to withstand plunging oil prices better than the rest and protect their top and bottom lines to a certain extent on downstream strength.
The companies’ financial flexibility and strong balance sheet provide them with a larger war chest to draw upon in this highly-uncertain period for the economy. Most of them remain in excellent financial health, with ample cash on hand and investment-grade credit ratings with a manageable debt-to-capitalization ratio. On top of this, managements have established quite a track record of conservative capital management and cash returns to shareholders. They also pay a safe dividend, yielding attractive returns.
While all of them have suffered from the crude carnage over the past 18 months, holding on to them can still prove to be an astute move.
Midstream Space Still Exciting
A safer way of playing the sector would be to utilize Master Limited Partnerships (MLPs), which offer considerable returns at significantly lower risk.
Most MLPs are involved in storage, processing and transportation of energy commodities such as natural gas, crude oil, and refined products (like diesel and gasoline), under long-term contracts. As such, they have relatively consistent and predictable cash flows with minimal commodity price sensitivity – unlike the E&P companies, whose profits are highly correlated with energy prices.
Ramping up oil production during the past few years has caused the commodity market to enter oversupply territory. Still, there is no slowdown in the crude production as all the big players are competing for their own share. This definitely calls for storage and transportation services, especially when the analysts are expecting the oversupplied market to continue in 2016.
Importantly, the collapse in crude has markedly reduced the average price of U.S. gasoline, the most widely used petroleum product. This has resulted in record gasoline volumes across pipeline systems and a boon for operators whose compensation is based on the quantity moving through their system.
Given the current weaknesses in petroleum stocks, MLPs are probably the best method of investing in the sector. They also offer liquidity and tax benefits, which add to their appeal. This is why these stocks would make good additions to your portfolio.
We suggest Spectra Energy Partners L.P. (SEP), Magellan Midstream Partners L.P. (MMP) and Boardwalk Pipeline Partners L.P. (BWP) -- MLPs with low cost of capital and an investment grade credit rating.
Check out our latest Oil & Gas Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy.
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