After four months of rising crude oil prices, energy sector stocks are again getting some love from Wall Street. Yet despite their recent gains, most oil and natural gas stocks are trading below their pre-pandemic levels. Global demand for oil and natural gas is expected to rise appreciably in 2021 compared to 2020. And regardless of supply side uncertainties, higher demand would bode well for energy companies. In light of that, here are three top large-cap energy stocks to buy in March that look set to benefit from this continuing resurgence in demand.
Lower oil and natural gas prices severely hurt ExxonMobil‘s (NYSE:XOM) performance last year. The company posted an annual loss of $22 billion, including a one-time impairment charge of nearly $17 billion. ExxonMobil’s cash from operations last year fell significantly short to cover its enormous capital expenditures and dividends. Further, lapses on the part of management resulted in loud calls for a change from investors.
The recovery in demand and prices, however, helped ExxonMobil during the fourth quarter. For that reason, its results improved sequentially, excluding the impairment charge. That recovery should continue this year unless oil prices plunge to levels similar to those that prevailed in 2020. Though ExxonMobil’s performance suffers when there are steep declines in commodity prices, such drops have a history of reversing over time. Oil and gas companies use various means to weather such down periods. Preserving cash by lowering capital expenditures, engaging in cost reduction initiatives, cutting dividends, and selling assets are among the common options energy companies resort to in difficult market environments.
Case in point: ExxonMobil reduced its 2020 capital expenditures by $12 billion from its original planned figure of $33 billion. It intends to spend just $16 billion to $19 billion on capital projects in 2021. The company also achieved $3 billion in operational cost reductions last year. Management has stated that maintaining the dividend is one of its key priorities. It believes that its flexible capital plans for the next five years should allow it to keep its payout at current levels.
Flexible capital expenditure plans, cost reduction initiatives, and improving market conditions should support ExxonMobil’s performance in the coming months and years. Moreover, the company is finally advancing notably on the clean energy front as well. These eclectic factors would make ExxonMobil an interesting addition to your portfolio this month.
Canadian pipeline company Enbridge (NYSE:ENB) fits the bill for investors seeking steady dividend income. It has raised its payouts for 26 straight years. Additionally, it expects a steady growth in its distributable cash flow, which should support the continuation of that growth streak in the years to come.
Enbridge’s steady cash flows are supported by diversified assets that are mostly regulated or long-term contracted. For that reason, its earnings don’t fluctuate directly due to short-term shifts in commodity prices.
That doesn’t mean that the company is fully shielded from commodity price changes. In 2020, lower demand and prices led to there being some unused capacity on Enbridge’s key mainline pipeline system, which transports crude oil from Canada’s oil sands to refineries along Gulf Coast. However, due to its competitive pricing, as well as limited takeaway capacity from oil sands, the majority of that pipeline’s lost volumes have already returned.
The company is looking to put nearly CA$10 billion of growth projects into service this year. Earnings from these should support Enbridge’s dividend growth in the coming years.
Last year was grim for refiners like Valero Energy (NYSE:VLO). Refining margins and utilization rates plunged, and didn’t show substantial recovery even by the fourth quarter. That could change a bit in 2021. Once vaccines are more widely distributed and coronavirus cases drop off, people are likely to resume something like their old driving habits, boosting gasoline demand. The U.S. Energy Administration expects gasoline consumption to average 8.6 million barrels per day in 2021, up from 8 million barrels per day in 2020. That figure is expected to rise further to 8.9 million barrels per day in 2022.
Even at that point, though, consumption is expected to remain lower than in 2019, when it averaged 9.3 million barrels per day. That’s bad news for refiners, which have been forced to close some of their higher-cost refineries. They are also converting some facilities to produce renewable diesel in response to the expected higher demand for the same. As supply comes back into line with demand, refining margins and utilization rates should improve.
Valero Energy is among the best-placed refiners to benefit from this recovery. Unlike some of its top peers, Valero Energy hasn’t yet announced plans for the closure or conversion of any of its facilities. Instead, it is expanding renewable diesel production capacity at its new facility in St. Charles.
Valero benefits from low operating expenses and higher free cash flows than its peers, a reflection of its disciplined investment approach. With an attractive dividend that yields around 5% at current share prices, Valero Energy stock is a great buy this month.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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