2 top energy stocks to buy right now

Long-term investors need to think about both the good times and the bad when selecting investments. This is especially true when it comes to highly volatile areas like energy. The impact of the pandemic on the industry has been very telling and helps explain why you’re likely to want to stick with giants like ExxonMobil (XOM -5.32%) and Chevron (CLC -6.53%) today.

The short story

Since March 15, 2020, around the low of the last major oil shock, Cosmos Energy (KOS -13.38%)a small oil producer specializing in offshore drilling, saw its stock soar about 440%. Crescent Point Energy (GIC -10.24%)a small onshore producer in North America, saw its inventory rise even more, growing by more than 600%!

It’s hard to watch gains like these and not be drawn to these energetic stocks. There has to be something positive, although in this case the incredible rebound is tied to massive stock price declines (more on that below). Essentially, investors got over their fear, at the start of the pandemic, that smaller players like Kosmos and Crescent Point could be forced into bankruptcy due to falling demand and oil prices.

Image source: Getty Images.

Exxon and Chevron only rose about 140% and 85%, respectively, over the same period. These small energy stocks revolve around the giants of industry. This is actually not an unusual thing to see, even outside of pandemic-level market disruptions, as junior oil and gas companies tend to be much more sensitive to changes in energy prices. And this time around, oil has rallied considerably from a painful and incredibly rapid price drop in the early days of the coronavirus pandemic, when people at home led to a rapid and steep decline in demand. of petroleum.

Today, with oil prices still on the rise, it is more important to watch what happens when oil prices fall. For example, Brent Crude and West Texas Intermediate Crude, two key industry benchmarks, have trended lower over the past few months. Crescent Point and Kosmos Energy each fell 11% and around 1%, respectively. Exxon and Chevron, with much broader businesses, are up 8% and 5%, respectively.

That said, your market view wouldn’t be complete without looking back at the dramatic drop in energy prices in 2020. During this shocking period, Crescent Point and Kosmos fell roughly 80% each between Jan. 2020 and March. 15, 2020. It’s less than three months, although it was a time of great uncertainty and, as noted, there were very real concerns that smaller players in the industry might not survive. Few people could have endured such a blow without losing sleep. Exxon and Chevron didn’t weather this downturn, losing 45% and 30% respectively, but those are much easier numbers to digest than 80%.

CLC Chart

CLC given by Y-Charts

How do they do?

There’s no particular secret to the greater stability Exxon and Chevron are displaying, but it’s worth remembering the basics when small oil and natural gas drillers catch the eye of investors due to gains huge.

For starters, Exxon and Chevron are integrated energy companies. This means that they produce energy, transport it and transform it. They are exposed to the entire value chain, which helps to smooth financial performance over time, as parts of their business (e.g. refining) may actually benefit from lower oil prices. energy. Small power producers usually only focus on upstream activities (drilling) so their performance and bottom line is totally dependent on energy prices.

On top of that, Exxon and Chevron have incredibly strong balance sheets. Exxon’s leverage ratio is 0.26 times, while Chevron’s is an almost shocking 0.17 times. This gives them the financial means to take on debt during tough times so they can continue to spend on needed capital investments and support their generous dividends. Both are dividend aristocrats, despite the highly volatile nature of oil prices. To be fair, Crescent Point’s debt-to-equity ratio is a modest 0.23x, but its upstream focus gets all the attention when it comes to investor perceptions. Kosmos’ debt ratio is 3.4 times much higher.

The safest game

Chevron and Exxon are not perfect. For example, they will tend to lag during big oil and gas rallies, as we have seen recently. And they’re not moving as fast as some of their peers when it comes to investing in clean energy, which is a long-term issue to consider. However, if you want direct exposure to oil and natural gas today, when energy commodities have already seen a massive price increase, you should probably consider downside protection. In this scenario, Chevron and Exxon have historically held up better than smaller producers like Crescent Point and Kosmos Energy.

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