Energy stocks have finally cooled off. After a red-hot spring, the sector experienced a sharp decline in June as recession worries overtook bullish factors. As a proxy, consider the performance of the Energy Select Sector SPDR Fund (NYSEARCA:XLE). That exchange-traded fund is bouncing around a three-month low, and is down 22.9% since June 8, while the broader S&P 500 index is off 2.8%.
Three-quarters of the way through, July hasn’t given energy bulls much to cheer about either.
So is this the end of the line for the energy stock bull market? Hardly. Rather, it’s a much-needed correction after sentiment ran a little too frothy earlier this year. Yes, demand for key products such as crude oil and natural gas is now in danger of outstripping supply. Yes, the sector has faced chronic underinvestment since 2015. And yes, the invasion of Ukraine has thrown a wrench in Russian energy supplies for many years to come.
The bullish factors for energy stocks haven’t disappeared. Simply, the market has instead narrowed its focus to a shorter-time horizon. With the Federal Reserve on a mission to stamp out inflation, that may also create a short-term drop in demand for oil and gas products. So be it. For longer-term investors, energy stocks are a wonderful buy-the-dip opportunity today. Here are seven in particular that stand out.
Valero Energy Corporation
TC Energy Corporation
Exxon Mobil Corporation
Canadian Natural Resources Limited
Suncor Energy Inc.
HF Sinclair Corporation
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Valero (NYSE:VLO) is North America’s largest independent refining company, operating 15 plants across the continent. In past times, refining was a low profit margin business to which investors assigned little respect. Refiners were grinding along, trying to make a buck in a brutally competitive market.
Now, everything has changed. The near-complete absence of new North American refining capacity, combined with some plant shutdowns in recent years, has created a structural shortage of refining capabilities. Throw in a shift from the prior mix from heavy crude oils sourced from places like Venezuela to the new ultra-light crude from American shale, and the continent’s refining capability is not set up to meet the moment.
That being the case, the owners of existing refineries are getting to charge previously unheard of prices for turning crude oil into gasoline, diesel, jet fuel, asphalt, and everything else that originates from a barrel of oil. Valero is rolling in profits right now, and that seems likely to persist for at least the intermediate-term. Expect more dividend hikes and VLO stock buybacks from the refining giant in the months to come.
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Enbridge (NYSE:ENB) is one of North America’s largest pipeline operators. While the company is headquartered in Canada, it has an extensive array of midstream assets in the United States as well.
Unlike many peers, Enbridge is heavily invested in oil pipelines rather than just natural gas. This has served the firm exceptionally well in current market conditions where there is a shortage of oil capacity. In particular, American refineries are begging for heavier grades of oil which primarily come out of Canada. Enbridge, conveniently enough, has the majority of capacity in linking the Canadian oil sands to key American refinery hubs.
Given Enbridge’s essential role, it tends to have more stable earnings than other pipeline peers. This has allowed it to maintain and even grow the ENB stock dividend in recent years during a time when so many other pipelines were slashing their distributions.
TC Energy (TRP)
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TC Energy (NYSE:TRP) is the other dominant Canadian pipeline company. Unlike Enbridge, TC Energy is much more levered to natural gas instead of oil. While oil may be the king of fossil fuels, natural gas has also enjoyed a tremendous rally in recent months.
Since the invasion of Ukraine, the price of natural gas has soared to previously unthinkable levels across Europe. This has led to the more demand for exports of natural gas from North America to Europe. TC Energy will be an instrumental player in getting natural gas from production sites in the Americas to the liquified natural gas terminals needed to export frozen natural gas. TC Energy, with pipes spanning from Canada down to Mexico, is in a dominant position.
Like Enbridge, TC Energy’s superior management and conservative balance sheet allowed it to maintain its dividend during the energy bust of the late 2010s. And now, it should be able to provide TRP stock holders with massive income streams in coming years as its irreplaceable pipeline and storage assets gain value in this new energy bull market.
Exxon Mobil (XOM)
Exxon Mobil (NYSE:XOM) remains the king of American oil and gas. It has the largest market capitalization of any North American energy company. It has done so in part because of management’s steady and capable leadership.
In the late 2010s and 2020, many energy companies slashed their dividends while reducing investments in new energy projects. The industry went into a shell, in effect. Exxon Mobil, by contrast, kept powering ahead. It greenlit lucrative new projects such as its massive offshore oil field in Guyana. Additionally, Exxon Mobil held onto its prized chemical and refining facilities and also refused to cut its dividend in the wake of significant analyst pressure.
Exxon Mobil’s bold leadership during the energy bust has paid off big now. Its refineries are churning out record profits. The Guyana offshore field is providing key new supply in a time when the world is desperately looking for more crude. And XOM stock’s dividend remains as trustworthy as ever.
Canadian Natural (CNQ)
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Canadian Natural (NYSE:CNQ) is one of Canada’s largest oil companies. It primarily has built its empire on the oil sands found in the province of Alberta. Unlike traditional oil wells, oil sands are closer to what could be viewed as oil mining. The operator extracts rocks covered in oil-rich tar and processes this material to extract their heavy crude oils.
This is a great trait now. A traditional oil well tends to see its production drop quickly after an initial strong start. By contrast, this sort of oil mining has a minimal drop-off rate until the area runs out of this tar-covered material. Long story short, Canadian Natural has facilities already operating today that will have oil reserves until the 2040s and 2050s. In a world where governments and environmentalists have put many roadblocks in place to new production, low-cost long-lived resources such as what Canadian Natural controls are the best holdings in the new energy landscape.
Canadian Natural has been paying down debt prodigiously since oil prices turned upward in 2021. Soon, however, Canadian Natural will hit its desired debt paydown level. Once that is done, look for the company to shower CNQ stock holders with large dividend increases and a bigger share buyback program.
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Suncor (NYSE:SU) is the other large Canadian energy producer. Like Canadian Natural, Suncor is a major player in the oil sands.
However, Suncor is a more diversified business. One important piece of its business is that it owns crucial refining capacity. This has allowed Suncor to keep fat profit margins for itself instead of sharing them with refining partners. That’s particularly important as the Alberta oil sands are far from end consumers, so producers without offtake capacity have historically had to take big discounts to market value for their oil.
With the uplift in oil prices, Suncor has been improving its cash returns to shareholders. These include a 12% dividend hike earlier in 2022 along with a SU stock buyback that is running around 5% of the company’s outstanding float every year.
HF Sinclair (DINO)
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HF Sinclair (NYSE:DINO), formerly known as HollyFrontier, is another of America’s large independent refining companies. It’s less diversified than Valero. In return, however, it’s even cheaper than Valero. DINO stock is currently selling for less than five times forward earnings.
Sure, HF Sinclair is currently earning more money than it will be able to in more normal market conditions. Still, shares are trading at eight times estimated 2023 and 2024 earnings, which is hardly expensive even once this peak period of profitability ends.
In response to this surge in profitability, HF Sinclair instituted a dividend this year. It is also planning to buy back nearly 10% of the company’s total outstanding shares over the next year. This is simply a tremendous capital return policy for the firm’s shareholders.
On the date of publication, Ian Bezek held a long position in CNQ, SU, TRP, ENB, XOM stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.