Let’s talk about the oil industry. The coronavirus outbreak is impacting demand, as quarantines and travel restrictions reduce airline bookings, ship sailings, trucking schedules – all the fuel-burning transport of the modern world. And as demand goes down, production will fall, oil prices will fall, oil sales will fall – and share values in the energy sector will drop. One indicator, at least, is already clear: the oil benchmark, Brent, is down 17% since February 20.
But the coronavirus outbreak will pass. A vaccine will be found, quarantines will be lifted, trade and travel will resume – the ripples will weaken and fade. And the economy will still be running on oil. Which makes today’s low prices a fine point of entry for patient investors willing to play a long game.
We’ve used the TipRanks Stock Screener tool to pull up three energy stocks with Strong Buy ratings, high dividend yield, and upwards of 50% growth potential – the kind of stocks that will benefit from a temporary period of low share prices. Let’s take a closer look.
Archrock, Inc. (AROC)
We’ll start with Archrock, a midstream company in the natural gas industry. Midstreaming refers to the services that move fossil fuels from the wellhead to the terminals and on to the customers; without the midstream operations, oil and gas might as well stay in the ground. Archrock works with the compression equipment used to liquify, store, and transport natural gas. The company has operations throughout the lower 48 states.
Archrock just reported Q4 results, showing an earnings beat and revenue miss. At the top line, revenues came in at $245.99 million, 2.5% lower than expected but up 5.5% year-over-year. Bottom line EPS was 27 cents, 59% over the forecast and up an impressive 93% sequentially.
The company’s report also included $64.2 million in cash available for dividend payments – an important figure, as AROC’s regular dividend yields 8.2%. The company pays out 14.5 cents per share quarterly, and has maintained a reliable payment for the last four years. With plenty of cash available, and payout ratio of just 53%, this dividend is a strong attraction for income minded investors.
RBC Capital’s 5-star analyst TJ Schultz sees plenty of reason for optimism in Archrock. He writes, “4Q in-line… we believe there is still increased conviction of AROC hitting its leverage target of <4.0x and generating positive FCF in 2020. At <8.0x our 2020E EV/EBITDA and a stable compression market environment, AROC’s stock screens attractive in our view.”
Schultz gives AROC shares a $14 price target, implying a high upside of 98% to back his Buy rating. (To watch Schultz’s track record, click here)
Archrock has a unanimous Strong Buy consensus rating, based on 3 recent Buy-side reviews. The stock is selling for a bargain price, just $7.02, and the average price target of $12.75 suggest room for a robust 82% upside potential. (See Archrock stock analysis on TipRanks)
Energy Transfer LP (ET)
Let’s stick with the midstream sector for now. Energy Transfer has activities in 38 states, but its main operations are in the Midwest-Appalachia-Delaware and the Texas-Oklahoma-Louisiana regions. ET’s assets include pipelines, terminals, and storage facilities for crude oil, refined oil products, natural gas, and natural gas liquids. The company has a market cap of $29.8 billion.
Late in February, ET reported Q4 earnings, showing top line quarterly revenues of $13.72 billion and EPS of 38 cents. Both numbers beat the expectations, and were up year-over-year. Distributable cash flow grew 2% over the past 12 months, to reach $1.55 billion. It was a solid quarterly report that the company had to bad luck to release on the same day coronavirus fears spooked the markets.
On a positive note – because you can always find a silver lining – ET’s dividend is now yielding 11%. The 31-cent quarterly payment has been steady for the last two years, and the company boasts an 11-year history of reliable payouts. While the payout ratio is high, at 80%, it still indicates that ET can continue to maintain the payment at current income levels. With markets turning down, a profitable company paying out a reliable high-yield dividend has clear attractions for investors.
5-star analyst Elvira Scotto, of RBC Capital, agrees. She writes of the stock, “We believe ET is well-positioned to generate meaningful cash flow growth as large-scale growth projects come online over the next few years. Moreover, with its expansive asset footprint, we expect ET to continue to identify highly accretive growth opportunities over the coming years while maintaining a strong balance sheet. We expect ET to turn FCF positive after distributions starting in 2021…”
Scotto sets a Buy rating on ET, and backs that with a $17 price target. Her target suggests room for 53% growth to the upside. (To watch Scotto’s track record, click here)
Energy Transfer is another company with a unanimous Strong Buy consensus rating – this one based on 6 Buy-side reviews. The stock is affordable, at just $11.10 per share, and the $17.60 average price target implies an attractive upside of 58%. (See Energy Transfer stock analysis on TipRanks)
Devon Energy (DVN)
Last but not least is Devon Energy, a mid-size oil and gas exploration and drilling company with a $6 billion market cap and operations Texas, Oklahoma, and New Mexico, plus Wyoming. Devon has rights and leases on 3.8 million acres of land, where it operates over 21,000 wells. The company’s proven reserves total 757 million barrels of oil equivalent, and its annual production exceeds 300,000 barrels of oil equivalent per day.
Devon reported mixed results for Q4 2019. Production was up – at 340,000 barrels per day in the quarter, it was more than double the year-ago figure, but revenues were down impacted by low prices on the oil markets. The top line totaled $1.589 billion, down 55% year-over-year. There was good news, however. EPS, at 33 cents, was 13% higher than the 29-cent estimate, and up 43% sequentially from Q3.
Devon pays out a reliable quarterly dividend to investors, which has held steady at 9 cents for the past year and grown modestly over the past 4 years. The annualized payment, 36 cents, gives a yield of 2.2%, which may not sound like much but is still a quarter-point higher than the average dividend yield among S&P-listed stocks. Even better for investors, the company has announced 22% increase in the dividend, to 11 cents, which will be payable this coming June 30 to shareholders of record as of June 15.
Seibert Williams Shank analyst Gabriele Sorbara sees plenty of potential in Devon energy. After the quarterly report, he wrote, “DVN reported a solid 4Q19 with an oil production beat on lower spending driven by Delaware Basin execution… The 2021 program is also expected to generate mid-to-high single digit oil production growth with flattish capex spending (vs. 2020). We believe the 2020/2021 program generates a solid balance of oil growth and FCF that should be well received by investors. DVN also announced its Board approved a 22% increase in its quarterly dividend to $0.11/share…”
Sorbara puts a $32 price target on DVN, showing his confidence in a powerful 97% upside to the stock. (To watch Sorbara’s track record, click here)
Overall, DVN shares have 12 recent analyst reviews, including 9 Buys and 3 Holds. The stock is selling for $16.22, and the average price target of $32.10 indicates a 98% upside potential. (See Devon Energy stock analysis at TipRanks)