Oil and gas prices are historically volatile, making investing in the sector difficult. However, global energy demand continues to rise, and years of underinvestment and other geopolitical factors could keep oil and gas prices high in the coming years.
There are different approaches you can take if you want to add energy exposure to your portfolio. Maybe you want reliable income from steadily increasing dividend payments. Or perhaps you would like to exploit the long-term upside potential of oil and gas prices. If so, here are two no-nonsense energy stocks you can add to your portfolio today.
1. ExxonMobil
ExxonMobil (NYSE:XOM) is one of the largest oil and gas companies in the world. Its long track record of increasing its dividend payout makes it attractive to investors looking for stable income.
Inasmuch as integrated oil and gas company, ExxonMobil operates across the entire oil and gas industry value chain. This includes the exploration and extraction of oil and natural gas (upstream operations), transportation and storage (midstream operations), and the refining and distribution of oil and gas (downstream operations); ExxonMobil does it all.
By spreading its operations across the value chain, ExxonMobil’s business is more resilient to changes in oil and gas prices. Its upstream operations benefit from high oil and gas prices and can generate significant growth when prices rise.
For example, in 2022, when oil prices rose following Russia’s invasion of Ukraine, ExxonMobil’s upstream profits increased from $15.7 billion to $36.5 billion. dollars. However, these profits can be incredibly volatile. Last year, when prices stabilized, ExxonMobil’s upstream profit fell nearly 42 percent, to $21.3 billion.
This is where its midstream and downstream operations provide stability. The transportation and refining of oil and gas can offset fluctuations in the price of oil and gas. Indeed, its refining business benefits from falling oil prices (due to lower input costs).
The oil market could remain “extremely tight,” according to hedge fund Citadel (as reported by the Financial Times). Indeed, the Organization of the Petroleum Exporting Countries (OPEC+), which reduced its production to boost global oil production, has “regained control” of the oil markets. The organization is reducing production by 5.86 million barrels per day, or 5.7% of global demand, and recently extended its production cuts until 2025.
For 41 consecutive years, ExxonMobil increased its dividend payout. The company took advantage of the boom a few years ago to consolidate its balance sheet and increase the return on capital for its shareholders. With energy demand rising and oil prices potentially high due to production cuts, ExxonMobil is a strong, stable energy company you can invest in for the long term.
2. Western Oil
Western oil (NYSE:OXY) operates primarily upstream, exploring and producing oil and gas, but also engages in midstream activities, which constitute the remainder of its business.
The company made a splash in 2019 when it acquired Anadarko Petroleum in a deal valued at $55 billion. With the help of Berkshire Hathaway, Occidental beat Chevron to acquire the company and strengthen its position in the oil-rich Permian Basin. However, the timing proved to be quite poor as global pandemic-induced shutdowns caused oil and gas prices to collapse.
The company overcame difficulties and was able to consolidate its financial position following the rise in oil and gas prices. In 2022, it generated record net income of $12.5 billion and free cash flow of $13.6 billion. She used the windfall to pay down $10 billion in debt and bought back 15% of Berkshire’s preferred stock. The two measures reduced annual spending by $520 million.
Occidental’s operations are not as diverse as ExxonMobil’s. Because it relies on upstream operations, the company is more vulnerable to falling oil and gas prices. As oil prices stabilized last year, its net income fell nearly 70 percent, to $3.7 billion.
However, the aforementioned OPEC+ production cuts, coupled with the replenishment of strategic reserves, could keep oil prices high. In an interview with CNBC, Occidental CEO Vicki Hollub noted that the world is failing to replace crude reserves fast enough. Notably, the Strategic Petroleum Reserve (SPR) maintained by the U.S. Department of Energy (DOE) has fallen to its lowest level in 40 years. As the United States rebuilds its reserves, it could keep a floor on oil prices.
Longer term, Occidental is investing heavily in direct air capture technology, which allows it to capture carbon dioxide from the air to store it underground or use it to create clean transportation fuels.
This technology, known as carbon capture, utilization and sequestration (CCUS), could become a huge market as companies seek to reduce their carbon footprint. Hollub said CCUS could become a $3 trillion to $5 trillion global market.
Occidental relies heavily on its upstream operations and high oil and gas prices to generate strong cash flow. However, if you’re bullish on oil prices and want to capture the potentially colossal opportunity in CCUS as companies reduce their carbon footprints, Occidental is a great energy stock to grab today.
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Courtney Carlsen holds positions in ExxonMobil and Occidental Petroleum. The Motley Fool ranks and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Mad Motley has a disclosure policy.
2 Obvious Energy Stocks to Buy Right Now for Under $500 was originally published by The Motley Fool
