In this episode I review the top 5 energy stocks in the market today.
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It has been one crazy year for energy stocks as the global coronavirus pandemic has disrupted supply chains, sapped demand and resulted in extreme volatility for oil and gas prices.
In fact, fears of oversupply and a lack of storage in April briefly drove West Texas Intermediate crude oil futures into negative territory for the first time in history but as markets have stabilized into 2020 it's late innings oil has bounced back and now sits at roughly $45 a barrel.
That's flirting with the highest levels since early March providing a sign that things are not quite as dire as they were several months ago for the energy sector. And this has analysts excited about the potential for some of the best energy stocks in the space going forward.
As we look to 2021 it's important to take stock of which energy-sector stocks are doing well and which ones are not. Some have indeed been hit so hard that they might take time to recover. However, other resilient names have recently added a lot to their share prices and could be smack-dab in the middle of a rebound.
So, if you're looking for the best energy stocks as we enter the New Year, here are five picks in the sector to consider. But before we get started, if you are new to my channel please subscribe and hit that bell notification so you will know when I release more stock trading tips and make sure you stay to the end so you don’t miss out on any of these promising energy stocks.
The first one up is Williams Corporations. Pipeline operator Williams is a stock that offers a relatively stable energy investment with a robust dividend. In fact, with a 7% plus payout at present it is among the top 10 dividend payers in the S&P 500 when measured by dividend yield.
Sure, some other energy stocks out there offer up similar or even higher yields but they aren't as established as the $26 billion Williams Corporation which is listed among the top 500 US stocks.
As a midstream energy company Williams benefits from a wide moat created by the regulatory oversight of its operations and the huge capital expense it would take for a competitor to enter its markets. Furthermore, Williams negotiates long-term contracts with customers providing reliability to an already consistent business model that relies on transportation and storage rather than exploration and production.
This is evidenced by the fact that Williams recently reaffirmed its prior 2020 forecasts from before the pandemic despite all the volatility we've seen for the energy markets this year. That kind of stability makes Williams one of the best energy stocks to buy now for a fruitful 2021.
The second stock on my list is Phillips66. With shares roughly half where they were trading at the start of this year refinery play Phillips66 has certainly seen better days. But if you've followed energy markets long enough you should know that eventually fallen giants like this 28 billion dollar refiner get cheap enough that their undeniable value makes them worth an investment anyway on the hopes of a recovery.
Sure, Phillips66 is hurting. Its operations have posted a $3.4 billion loss across the first nine months of the year compared with $2.3 billion in profits by the same point in 2019.
However, it cannot be overlooked that amid all this chaos, Philips66 has retained its investment-grade ratings even as other energy stocks are stuck in junk bond territory. What's more, the company's financial team continues to target debt reduction instead of relying too much on debt right now when times are tough.
This is an important shift in thinking since after the spinoff from parent Conoco Phillips in 2012 Philips66 made several large debt offerings with some of the proceeds going to share buybacks which Phillips did earlier this year.
This kind of discipline in a moment of crisis will serve Phillips66 well as it looks to the future. Meanwhile, its size and diversification should serve investors in energy stocks well as we head into 2021.
Moving on to energy stock number 3 which is Diamondback Energy. While this company was hit hard in early 2020 like most other energy stocks, Diamondback Energy has come back with a vengeance. Its shares have shot about 160% higher from their 52-week low in spring. That's thanks in part to rising energy prices but also because of a well-timed cost-savings plan that has boosted efficiency at the right time.
Consider that Diamondbacks well costs are down 30%t compared with 2019 numbers, according to recent comments from CEO Travis Stice. This, alongside a steady improvement in oil and gas pricing has allowed Diamondback to re-affirm its 2020 guidance. These results, demonstrating that the worst looks behind the company now helped fuel the stock's rally of more than 50% in November.
Diamondback Energy stock remain a risky play, but with at 6 billion dollar in market capitalization it is decidedly more mature than some of the small-cap players in the oil patch that have been hit hardest. Furthermore, it remains soundly profitable so it can make it through any short-term disruptions.
Now, throw in a healthy dividend of nearly 4% as many other energy stocks are slashing distributions, and you have a pretty good case for hanging on to Diamondback energy and hoping the current run for the sector continues into the New Year.
The fourth energy stock is Conoco Phillips. At more than $40 billion in market value, Conoco Phillips is already one of the largest US energy stocks out there but its operations are set to swell in 2021 as it acquires Concho Resources in an all stock deal valued at about $10 billion.
Of course, that comes with $3 billion in debt on top so the all-in price tag ultimately results in a 15% premium over where it was trading in October when the deal was announced. However, it's still very attractive because of Concho's overall business that offers low-cost resources via onshore shale oil fields largely in West Texas and New Mexico.
For a worldwide energy firm, these domestic assets with lower extraction costs on average are worth paying a premium for. Besides, a $10 billion deal is not a small opportunity. The combined company expects to realize $500 million in cost savings as soon as 2022. And with only about $15 billion in total debt Conoco Philips boasted an overall debt-to-equity ratio of only about 0.35 at the time of the deal; for comparison's sake, many smaller energy firms have more than three times their market value in long-term obligations at present.
Conoco Philips has a big brand, a strong balance sheet and capable management to make the most of this acquisition as we turn the page on 2020 and that could make it one of the best energy stocks to buy for 2021 as we enter a more favorable environment.
The last stock I want to mention is Cimarex Energy. Denver-based Cimarex Energy is an independent oil and gas exploration and production company with nearly 620 million barrels of proven reserves and owned interests in roughly 2800 productive oil and gas wells.
Being an independent energy company in 2020 hasn't been easy but Cimarex it’s management rose to the challenge with quick and decisive action that has put it in a strong position now that 2021 is right around the corner.
Perhaps the boldest move of all at Cimarex was a massive production cut in spring that shut down all operations and on top of that Cimarex slashed more than half of its planned capital expenditures to balance the budget – and as a result, there's a good chance it will actually turn a profit this fiscal year now that operations are beginning to normalize.
UBS analyst Lloyd Berne who has a Buy rating on shares adds that "we expect Cimarex to continue looking for opportunities to divest non-core assets."
Warren Buffett's investing advice has become cliché for good reason, and one of the things he places a big priority on is finding companies managed by a smart and capable team. Making hard choices like this proves that Cimarex knows what it takes to run their business in hard times and as oil prices move higher, investors can have confidence that management's decision-making skills will result in continued success in the New Year.
So these are the 5 best energy stocks for this month, thanks for watching and make sure to watch the next stock trading videos that should show up right about now.