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All Contents © 2020The Kiplinger Washington Editors
By Aaron Levitt
| November 2016
Let’s face facts. No matter how much we try to conserve energy and burn cleaner fuels, at the end of the day, the planet consumes a lot of energy. And that’s not going to change anytime soon.
According to energy giant Exxon Mobil Corporation (XOM), global energy demand will rise by more than 25% between 2014 and 2040. Driving that will be increased usage by non-OECD countries and emerging-market nations as they finally … well, emerge. Rising standards of living will also spark demand for electricity and transportation fuel.
Energy-efficiency measures will help stem the tide, but the sheer growth in demand is still going be massive.
All of this bodes well for energy stocks as a whole.
That’s great for investors, and so is this: Right now, investors still can get into a number of energy stocks for relatively cheap prices. Across oil, natural gas and solar, most companies haven’t fully recovered from the 2014-16 rout in energy prices.
If you have your eye toward the very long term, however — namely, retirement — you need to build a portfolio of energy stocks that will either provide long-lasting growth or reliable dividends. Swing trades can help augment your returns, but you need a base to rely on.
I’ve compiled a list of seven energy stocks — from various parts of the energy arena — to buy and then hold on to forever.
Mike Mozart via Flickr (Modified)
Speaking of Exxon, there’s no better energy stock to lead off this or any other list of no-brainer energy stocks to buy for the long haul.
Exxon Mobil is one of the largest energy producers on the planet, boasting assets and economies of scale that few companies can match. XOM holds it all, from conventional bread ‘n’ butter wells to chemical refineries.
This breadth of holdings allows XOM to produce cash flows that rival some small nations’ gross domestic products. It also allows Exxon to profit in every sort of energy environment. Are oil prices low? Major refining assets pick up the slack. High natural gas prices? The E&P arm takes over.
Exxon also is forward-thinking. Sensing the shift in how the world generates electricity, XOM has plowed headfirst into natural gas production and LNG shipping. These resources — such as its recent buyout of InterOil Corporation (IOC), which holds energy project licenses in Papua New Guinea, and its 2010 buyout of XTO Energy — will help drive future cash flows and put a tiger in Exxon’s tank.
Exxon’s share price remains depressed thanks to lower earnings. While XOM is up about 10% year-to-date, it’s still off roughly 20% from its 2014 highs. And sure, while Exxon trades at 20 times forward earnings projections, that’s based on profits that are expected to skyrocket from $2.17 per share to $4.27 per share.
Exxon Mobil will recover. It always does. Meanwhile, it throws off 3.5% in dividends at current prices. There’s no beating this world-beating pick.
Bjoertvedt via Wikimedia (Modified)
“No Other Vendor” is National-Oilwell Varco, Inc.’s (NOV) unofficial motto. That motto is derived from Varco’s standing as a major supplier of oil rig and drilling parts for the energy sector — in fact, estimates say that 90% of all oil rigs (offshore and onshore) have at least one part that came from the company.
That’s an incredibly wide moat.
No matter what segment of the energy industry is doing well, National-Oilwell Varco has a hand in making that production happen. NOV also has plowed heavily into building out its services and replacement parts division, which will have E&P firms coming back to Varco for years after the initial sale is made.
As energy demand continues to rise, then, NOV’s dominance of the rig parts market will persist.
Yes, National-Oilwell Varco has been clobbered since 2014, losing as much as 70% of its value from peak to trough. Even with its 2016 recovery, NOV remains 60% off those highs. That’s because lower rig demand has put a damper on the company’s near-term prospects. Varco even had to cut its dividend almost 90% to conserve cash.
But the company has used that cash to lower expenses, buy smaller rivals and beef up its own operations. So now that drilling is starting to return, NOV is better positioned to rake in the sales.
If you’re looking the best energy stocks for the future, EOG Resources Inc. (EOG) has to be on the list.
The independent energy firm is actually one of the best at what it does in the here and now. EOG smartly positioned itself early in new, unconventional fields, such as the Eagle Ford and Bakken shale. As an early adopter, EOG owns some of the best and highest-producing acreage. And much of that acreage is low-cost, to boot.
EOG has used its first-mover status to become one of the biggest suppliers of new crude oil, natural gas liquids and natural gas in the nation.
But EOG hasn’t rested on its laurels. Management continues to be smart about how and where it drills, quickly evolving with oil’s low-price environment. Using lower oil services costs, EOG has drilled — but not tapped — its production. So as oil rises into the future, EOG will be able to just turn on the spigot and increase production.
EOG’s ability to spot trends and adapt continuously makes this one of the best energy stocks to buy and hold forever.
Roy Luck via Flickr
It’s important to produce enough energy to meet demand. But moving energy to where it needs to go is equally as vital.
That makes Kinder Morgan Inc. (KMI) one of the best energy stocks to hold for decades.
Kinder Morgan boasts more than 84,000 miles’ worth of pipelines, numerous terminaling assets, storage tank farms, barges, ports, and ships/barges. If it produces energy — crude oil, coal, you name it — KMI ships and/or stores it. It’s the largest midstream firm in the nation.
Only a handful of firms are on part with Kinder’s asset base, giving the company a huge economic moat that few can replicate.
But the familiar story returns — KMI, like most energy stocks, struggled while energy prices plummeted. Pressures at Kinder Morgan’s CO2 division and process facilities have crimped earnings. And KMI had to drastically reduce its dividend to reduce its high debts and pay for future expansion.
Nonetheless, Kinder Morgan looks good for the very long haul. As energy demand rises, it will ship that energy across the nation and out to sea. Ignore the short-term noise and bet big on KMI stock.
General Electric Company (GE) seems like a weird choice for an energy stock, considering it’s … well, an industrial stock.
But GE is tied to energy in too many ways to knock it out on a technicality.
General Electric has been ridding itself of financial assets and focused on making stuff again. And much of that manufacturing includes power and grid products. The acquisition of Alstom has made GE an even bigger giant in wind and hydroelectric power generation. And the company beefed up its grid operations.
But GE also is becoming important in the world of energy production. General Electric is one of the leading producers of “Christmas Trees” for deep-sea production, artificial lift jacks and a whole host of other needs for the oil and gas industry. That position will only become stronger once GE closes on its Baker Hughes Incorporated (BHI) deal, adding pressure pumping and other products to the mix.
General Electric plans to spin off its oil and gas division after the deal closes, but investors should hold on to both companies after the split. You’ll get production with one, and usage with the other.
Warren Buffett is in love with Phillips 66 (PSX) for a reason. It simply is one of the best downstream energy stocks you can buy for the long-term.
Phillips 66, which was spun off from ConocoPhillips (COP), is one of the largest refiners in the country. The key is that it doesn’t just produce gasoline, but high-margin petrochemicals, too. And PSX continues to expand into this area via its joint venture with Chevron Corporation (CVX).
Also, its refineries are located in the Gulf Coast near some of the biggest ports in the nation. Increasingly, more of its products are being shipped overseas.
But Phillips 66 isn’t just a downstream player, and this is the part that Warren Buffett likes. It’s quickly becoming one of the largest midstream firms in the country. COP had a lot of pipelines and other assets that went with PSX during the spinoff. Philips has continued to expand on those initial assets with new builds as well additional acquisitions. What’s even better is that it can tuck them into its Phillips 66 Partners LP (PSXP) master limited partnership to save on taxes.
What you get a cash flow machine that can produce and ship various refined products all over the world. That makes it hard to not like PSX.
U.S. Department of the Interior via Flickr
Fossil fuels will likely dominate the landscape for a long time. But renewables are capturing market share. And while solar stocks have been hit in the teeth with the recent election of Donald Trump as president, a couple of the major solar players should be able to stay alive long enough to eventually thrive.
To me, the only solar stock worth buying — not just trading — is First Solar, Inc. (FSLR).
First Solar offers some of the most efficient solar panels on the planet. They might cost more, but they generate more energy per panel than many rivals, and that benefits its buyers over the long-term.
Who’s buying? Well, utilities, among others. First Solar was the first solar company to adopt the new model of building out large grid-scale solar farms, then selling them to utilities and other power producers. This model has helped FSLR overcome many of the issues facing the solar sector. Even with a Trump presidency easing pressures on the fossil fuel front, many utilities have seen the writing on the wall — they’re adding renewable assets to their mix.
A steady stream of major projects here and around the globe will keep First Solar profitable (which it has been for years). So while FSLR is far from traditional, it still has staying power.
This article is from Aaron Levitt of InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.