Many will remember the oil prices dropping to as low as $27 a year ago with natural gasses feeling heavy pressure too. Oil performed at around 65% under its five-year average during that time. Companies buckled under the natural gas and oil prices with borrowing rates surging. Natural gas traded the lowest it has been in almost two decades, and energy analysts painted a bleak future for oil prices.
With such a grim look in the energy sector, investor confidence is at a low, but others see it as an opportunity for a massive comeback. In 2016, the energy sector was the top-performing S&P 500.
Why is investing in energy good right now?
Oil prices hit $50/bbl and natural gas rose $1 higher than a year ago. Despite the performance of the energy sector in 2016, the decline of Energy Select Sector SPDR (XLE) made it the worst S&P 500 since the start of the year.
With this setback in the sector, some investors are seizing the opportunity on sites such as OilandEnergyInvestor.com. The oil price outlook is moderately bullish – analysts in Saudi Arabia are estimating $60/bbl for crude trading in the country this year. History tells us that what the Saudis want as far as the oil market goes, they get. Many of the top oil producers will benefit from this trend. Even though there was a mild winter, the natural gas inventories are still 10% below the previous year.
Oil producers on the watch list
EOG Resources, EOG on the NYSE, had investors sticking with them due to their reputation as the most efficient shale oil company. Their balance sheet remains strong, even after the $30/bbl oil price drop. EOG’s net debt-to-total capitalization ratio sits at an impressive 31%. While their balance sheets are expected to suffer somewhat this year, it is still in a much better position than most shale oil companies. The oil price will recover, boosting the companies that can manage to last that long, and EOG has what it takes to survive until then.
Valero Energy Corp, VLO on the NYSE, is another oil refining company to stick with during this time. The biggest stand-alone company in the oil refining sector, VLO can produce a staggering 3 million barrels every day. The majority of their refineries can be found in the Gulf Coast, a location that allows them to easily export to Latin America, northern Europe, and eastern Canada – growing economies. VLO has one of the lowest costs per barrel, falling 20% below its competitors, and as much as 33% lower than the highest competitor.
As of late, VLO has made improvements to its safety profile and reliability. Increases in its dividend yields are expected to rise from 3.81% to 9%, and 9% for the following three years. Its current valuation is meeting historical valuations for companies that are expected to grow by 5% in earnings every year.
Natural gas producers to consider
BHP Billiton Ltd., BHP on the NYSE, has a range of income sources outside of natural gas and oil, including metal mining. Its assets are located in the Gulf of Mexico, Australia, Tobago, and Trinidad. As with other oil and natural gas companies, 2016 saw the BHP Billiton’s stock hit lows of $18 per share. It now trades at $40 per share – a figure that is expected to increase in the coming year. The increase in natural gas and oil in 2017 will benefit the company while giving it stability through its diversified product line.
Antero Resources Corp, AR on the NYSE, is an independent natural gas and oil company. AR has made their business model around exploring the resources found in the United States. It has around 292 miles of pipelines funneling gas from all over the country. The company has seen strong growth in production with another 25% increase expected in 2017. Its stock has remained virtually the same since last May, with a promising outlook for the year to come.
There is no use in investing when the markets are going well and there isn’t much chance for a loss; however, the best time to stake your claim is when the chips are down. While the energy sector continues to show little improvement in this year, now is the time to make your picks. The companies mentioned in this article are likely to be part of the top performers in the energy sector based on their history and the comeback of the sector.
Editor’s Note: Ruby Tomlinson shares her views when it comes to investing. She started on her investment portfolio when she was 30, believing it the ‘adult’ thing to do – She’s never looked back!