This Year, Energy Stocks Have Experienced Significant Gains, Yet, These Three Remain Notable Investment Opportunities
This year, the stock market has been thriving. Various sectors have experienced growth, including energy. The typical energy stock in the S&P 500 has increased by over 10% this year.
Even with this rally, numerous energy stocks still appear to be worth investing in. Chevron (-2.93%), MPLX (-2.37%), and Occidental Petroleum (-2.18%) are three such stocks that have caught the attention of some contributors on Fool.com. Here's why they consider these energy stocks to be promising sources of significant returns moving forward.
Chevron's load of advantages
Reuben Gregg Brewer (Chevron): When it comes to major integrated energy corporations, Chevron belongs to an elite group leading the charge. This corporation is substantial, boasting a market cap of $275 billion. It has a diverse portfolio, encompassing production (upstream), pipelines (midstream), and chemicals and refining (downstream). Its financial strength is impressive, with a debt-to-equity ratio of just around 0.17 times (among the lowest of its closest competitor group). Chevron also boasts a 30-year history of annual dividend increases.
However, Chevron has lagged behind the energy rally over the past year and trails behind ExxonMobil, its primary U.S. competitor. The hurdle is that Chevron is in the midst of attempting to acquire Hess, and Exxon seems to be obstructing the process. Exxon's partnership with Hess in a significant oil project is the primary reason for the hold-up, and this collaboration could potentially derail the deal. Investors may be hesitant towards Chevron at the moment, worrying that the deal's collapse would result in slower growth for Chevron. While this isn't unfounded, it's essential to remember that Chevron isn't a stock best suited for short-term gains but for long-term investments. Even if Exxon sabotages the Hess deal, Chevron can simply pivot and identify another acquisition target. Chevron may experience a temporary setback but is unlikely to crumble because of it. Therefore, the current underperformance could eventually transform into a golden investment opportunity. Additionally, it offers a tempting 4.2% dividend yield while investors await a resolution to the situation.
MPLX: The complete bundle
Matt DiLallo (MPLX): MPLX units have experienced a 25% gain this year thus far. Despite its impressive surge, the master limited partnership (MLP) remains an attractive investment opportunity.
The MLP's surge this year has not diminished its allure. Despite the MLP's strong performance, it still features a high yield of over 8%. This yield arises from a blend of affordability and sustained distribution growth. In fact, MPLX raised its distribution by another 12.5%, marking its third consecutive year of double-digit distribution increases.
MPLX enjoys a strong position to maintain its distribution growth at a reasonable pace. It generates ample stable cash and maintains a conservative distribution payout ratio. As of September 2024, MPLX produced sufficient cash to cover its distribution, capital investments, and a couple of acquisitions. The MLP has a robust financial profile with a low 3.4 times leverage ratio (well below the 4.0 times its stable cash flows could support).
MPLX is planning to expand its midstream footprint, which is augmenting its capacity and cash flow. The company has several projects underway, offering visibility into its growth through 2026.
MPLX is the perfect investment for risk-tolerant investors. It offers a compelling combination of income and growth at a reasonable cost. Because of that, it remains an excellent purchase choice for those comfortable investing in an MLP, which sends investors a Schedule K-1 federal tax form each year.
Occidental's acquisition benefits
Neha Chamaria (Occidental Petroleum): Shares of Occidental Petroleum have lagged this year, decreasing by 15% as of this writing. Investors may have been concerned about the impact of the recent slide in oil prices on a company burdened with debt, but they may have overlooked Occidental Petroleum's recent initiative. The oil and gas giant is doing what it needs to do — boosting cash flows and repaying debt, making Occidental stock an opportunity investors should take advantage of while it lasts.
Occidental reported substantial profits in its third quarter, despite a decline in commodity prices, primarily due to higher production brought about by its recent acquisition. Occidental acquired CrownRock in August for approximately $12 billion, including debt, and anticipated the acquisition to immediately enhance its cash flows. In the third quarter, Occidental registered its highest operational cash flow for the year so far.
More significantly, Occidental pledged to divest assets and repay debt totaling around $4.5 billion within a year of acquiring CrownRock. The company has already repaid debt worth $4 billion in the third quarter alone, having completed the deal just two months ago.
Thanks to CrownRock, Occidental increased its full-year production guidance for the Permian Basin, which I expect to continue bringing in strong cash flows and debt reduction. A robust balance sheet – arguably the most significant asset for a commodity stock – is what Occidental Petroleum is working towards, and it is making steady progress in this regard.
Despite the stock market's success this year, some energy stocks still present promising investment opportunities. Chevron, with a market cap of $275 billion, is one such stock, despite trailing behind its competitor, ExxonMobil. Chevron's diverse portfolio, financial strength, and history of dividend increases make it an attractive long-term investment, even with the pending acquisition of Hess facing some challenges.
The strong performance of MPLX units this year, combined with a high yield of over 8% and a robust financial profile, makes it an attractive choice for risk-tolerant investors seeking a blend of income and growth.
