6 High-Quality Energy Stock Picks

With the economy strengthening and inflation fears on the rise, energy stocks have been increasingly popular among investors. For diversification across the energy sector, MoneyShow contributors highlight six industry leaders -- two of the largest global integrated firms, two leading MLPs and the two top players in the oil services sector. Adam Johnson, Bullseye Brief Oil stocks have only just begun to re-inflate and I want to add an oil field services company to the portfolio. The one I have in mind ranks #1 in North America, and it's as much about technology as oil. I like that combination, especially now. Halliburton Co. is the largest oil field services company in N. America, providing investors significant leverage to normalized oil demand associated with economic rebound. While U.S. consumption is still 2 million barrels per day below pre-Covid levels, recent inventory drawdowns suggest producers will need to find new sources of supply, and this is very good news for Halliburton. Exploration companies rely on Halliburton's technical expertise and specialized equipment to bring hydrocarbons to the surface. The company does not bear the risks associated with exploring for oil and gas, but instead collects considerable fees as an embedded services provider... another positive for investors. The stock has rebounded from earlier lows, but still trades at a 65% discount to it's pre-Covid high. I believe this gap will narrow as oil demand rises, reflecting a potential doubling of current earnings estimates into 2022. Halliburton's impressive first-quarter earnings beat estimates for a thirteenth consecutive quarter, and CEO Miller expressed confidence in the results as a harbinger of additional upside ahead. The company managed to make money even during last year's virtual cessation of new drilling, and sequential growth is anticipated over the next several quarters. On a year-over-year basis, Halliburton is guiding analysts to 50% EPS growth annually through at least next year. By 2023, Halliburton is expected to approach its pre-Covid earnings high of $1.90/share, implying a forward P/E ratio of 11.4x ... well below its pre-Covid average of 22x. Current skepticism could become a catalyst for the stock in coming months. As analysts raise estimates and targets, institutional investors will buy. This may take a while, but I believe HAL will trade appreciably higher as oil demand returns and Wall Street plays catch-up. Mike Cintolo, Cabot Top Ten Trader To this point, oil service and equipment firms have lagged explorers, but the longer this nascent industry recovery goes, the more demand will develop (especially overseas) for big outfits like Schlumberger . The firm, of course, is one of the granddaddies of the oil service sector, and the industry doldrums had it following the usual script: Costs were slashed and the company reorganized into a few new areas, including its Digital and Integration segment (largest in terms of pretax income), which focuses on helping drillers adopt cloud and automation to increase efficiencies. There's also a focus on services and technology that address the climate issue (reduced flaring and methane emissions, etc.). But at day's end, business (and the stock) will likely be driven by the capital equipment cycle of explorers (well construction and reservoir performance segments), and the news is increasingly bright on that front. Adjusted for some small divestitures, North American first-quarter revenues were up 10% sequentially, free cash flow was positive for the third straight quarter, while international prospects are looking solid (where the vast majority of Schlumberger's money comes from), with double-digit expected growth in the second half of this year and potential boom times in 2022. Possibly most important was that the company is now lean and mean; management has stated it believes cash flow will return to 2019 levels even if revenues make up only half of the decline! Translation: Sales and (especially) earnings are headed way up in the quarters to come as worldwide energy activity picks up. Analysts see earnings up 63% this year and 42% next, while the dividend (1.6% annual yield) puts a nice cherry on top of this early-stage turnaround story. Elliott Gue, Energy & Income Advisor Our forecast for this year remains the same: Investors will ultimately get more comfortable with higher commodity prices and energy stocks will catch up to them, matching and ultimately greatly exceeding pre-pandemic prices. So far in 2021, ExxonMobil is the best-performing supermajor, up more than 45% on a total return basis. Looking at their quarterly earnings numbers, it's not hard to see why -- unlike most of its peers, the company invested in major new upstream projects straight through the down-cycle, positioning Exxon to expand low-cost production through the coming up-cycle. In first-quarter 2021, Exxon generated total earnings of about $2.554 billion from its upstream business (oil and gas production) compared to just $745 million in fourth-quarter 2020. Obviously the most crucial driver of that was the improvement in commodity prices, which accounted for more than $2.0 billion in incremental quarterly earnings, partly offset by a $240 million hit from severe winter storms in Texas and a variety of smaller factors. The two big drivers of volume increase in the upstream business are the Permian in Texas and Exxon's world class Guyana asset, where production is up a whopping 70% since first-quarter 2020. All told, Exxon generated enough cash in the quarter to cover its cash capital spending of $2.7 billion and dividends of about $3.7 billion while still leaving room for ExxonMobil to reduce debt by $4 billion. For the year as a whole, management left capital spending guidance unchanged at $16 to $19 billion. The main bear case for Exxon was based on the view that the company was borrowing to pay its dividend and fund upstream capital spending. Indeed, the company did NOT cover its dividend with operating cash flow when commodity prices collapsed, and net debt swelled from under $35 billion at the end of $2018 to more than $68 billion at the end of last year. However, since that time, commodity prices have entered a new up-cycle and Exxon's upstream investments are paying off in the form of rising low-cost production. As a result, net debt is down to $63.3 billion and, should commodity prices remain elevated as we expect, we believe ExxonMobil will continue to reduce debt back below $50 billion by the middle of 2022 while maintaining its current 5.9% yield. Buy ExxonMobil up to $65. Bill Selesky, Argus Research We are reaffirming our buy rating on Chevron Corp. ; the company's first-quarter 2021 results were hurt by Covid-19, though we expect these effects to diminish in the coming quarters. Chevron -- the result of the 2001 merger of Chevron and Texaco -- also recently completed the acquisition of Noble Energy, which will provide additional diversification and expand its already sizable shale position in the U.S. The acquisition has enabled Chevron to acquire premium assets at bargain-basement prices. In this volatile energy environment, we believe that a company's balance sheet strength and place on the cost curve are critical, and favor integrated oil companies that are well positioned to manage a potentially long period of volatile oil prices. We believe that CVX is one of these companies as it benefits from best-in-class production growth, industry-low operating costs, and a strong balance sheet. We also like the company's strong free cash flow and believe that the dividend, which yields nearly 5%, is safe and sustainable. On April 28, 2021, Chevron announced a 4% increase in its quarterly dividend to $1.34 per share, or $5.36 annually, beginning with its June 10 payment. The projected yield is about 4.9%. Chevron has increased its annual payout for 34 straight years. Our revised dividend estimates are $5.31 (raised from $5.20) for 2021 and $5.40 (raised from $5.24) for 2022.We consider the dividend to be safe and sustainable. The shares were recently trading at 20.2-times our 2021 EPS estimate and at 17.4-times our 2022 forecast, compared to a 10-year annual average range of 13-37. We believe that the stock's relatively high multiples are warranted based on CVX's size, geographic reach, and balance sheet strength. Our revised price target of $127 implies a multiple of 20.7-times our 2022 EPS estimate and a total potential return, including the dividend, of 24% from current levels. Ben Reynolds, Sure Retirement Magellan Midstream Partners LP is a master limited partnership (MLP) that engages in the transportation, storage, and distribution of refined petroleum products in the United States. Magellan's model is fee-based, meaning it has very small exposure to commodity prices, making it attractive during commodity bear markets. Magellan was founded in 2000, produces about $2.5 billion in annual revenue, and is valued at a market capitalization of $10.7 billion. In late April, MMP reported (4/29/21) financial results for the first quarter of 2021. The MLP recovered from the pandemic thanks to improved demand for refined products, while it also benefited from the winter storms. We see distributable cash flow (DCF) of $5.00 for 2021. With 2021 likely being the bottom of the cycle for Magellan, units are attractively priced, as is the high distribution yield. We see growth for Magellan coming from new projects. The company invested $355 million in growth projects last year, with more than $500 million of potential growth projects under consideration. Buybacks are an additional DCF-per-unit growth catalyst. Magellan is in the midst of a $750 million unit repurchase program, and repurchased $277 million of its units in 2020. We project 3% annual growth in DCF-per-unit for Magellan over the next five years. We estimate fair value at 12 times DCF-per-unit, but the valuation is currently only at 9.5 times this year's estimated DCF-per-unit of $5.00. We see outstanding projected total returns of 13.9% annually over the next five years, the result of cash flow growth, the 8.6% distribution yield, and a 4.7% tailwind from valuation gains. MPLX LP is a master limited partnership that was formed by the Marathon Petroleum in 2012. The business operates in two segments: Logistics and Storage -- related to crude oil and refined petroleum products; and Gathering and Processing -- related to natural gas and natural gas liquids (NGLs). The $30 billion partnership generated $4.3 billion in distributable cash flow in 2020. On April 27, 2021, MPLX announced a quarterly distribution of $0.6875 per unit, equating to $2.75 on an annual basis. This payment marks the sixth straight payout at this rate (prior to 2020 the company had increased its dividend for 28 straight quarters). MPLX's industry generally holds competitive advantages as a result of the toll-booth model of pipelines and the necessity of the infrastructure. In addition, a good portion of the company's revenue is fixed via fee-based and take or pay agreements. We forecast 10.5% total annual returns in the coming years, consisting of 2% projected distributable cash flow growth and the 9.7% yield. MPLX trades for 6.9 times this year's distributable cash flow estimate of $4.10 and we assess fair value at 7 times distributable cash flow, implying little change from the valuation. If the payout is maintained, MPLX could offer a significant income stream.

6 High-Quality Energy Stock Picks

These plays are diversified across three distinct areas -- global exploration, oil services and MLPs.

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