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In recent years, many financial advisors have been wary of talking to clients about energy companies. So much so that it’s almost become taboo.
Undoubtedly, environmental, social and corporate governance concerns have played a role, with a growing number of investors now more interested in what’s on the list. their investments like never before. Global government-led decarbonization efforts and moves to produce alternative energy sources are also major factors in the decline in perception of traditional oil and gas assets.
Even so, there are several reasons why some companies in this sector are poised to do well and are therefore worth recommending to customers.
For one, demand will likely remain high. The emergence of the omicron variant of Covid-19 has spooked markets and worried economists, but the long-term impact is likely to be minimal. So far, hospitals have not been overwhelmed, and further closures in the US seem unlikely – although this could change as we learn more.
Second, domestic oil companies of late have prioritized buybacks and dividends over investing in new production capacity. The oil is there. But companies don’t seem to want to spend the time, money and effort to get it. As a result, supply will remain at an artificially low level, supporting higher prices.
Third, OPEC and its oil-producing allies like Russia, including OPEC+, cannot simply flip a switch. The perception that it could flood the market if it wanted to (perhaps not), which would lead to a price drop. But it may not be that simple.
Indeed, the cartel has missed production target for months. Undoubtedly, strategic reasons explain some of the shortfalls. However, many of these countries may face the same logistics, labor, and pricing issues as their US counterparts. So even if OPEC+ is willing to increase production, there is no guarantee that OPEC+ can do it quickly.
Fourth, oil and energy companies have long served as hedges against inflation, making them more likely to advance if the cost of goods and services continues to escalate. While the Federal Reserve for months maintained that the price spike was temporary, it is beginning to change its phase. Fed Chairman Jerome Powell recently signaled that policymakers will begin canceled their bond buying program earlier than expected, a tacit admission that inflation may last longer than they initially thought.
Many domestic companies have recently been spending heavily to reward shareholders, including Exxon and Chevron, both of which generate higher-than-average dividends. Royal Dutch Shell, although not a US-based company, does the same.
But keep in mind that these companies spent and borrowed money to develop new production capacity during the shale boom. The need to write off debt ratios will affect these companies’ ability to maintain dividends and buy back shares.
Certainly, with the current dynamics of the oil market, none of them are unattractive – they are not as well positioned as some of the others. Therefore, while dividends are good, it is not wise to achieve returns at the expense of total profits.
For their part, pure production and discovery companies can do much better. Unlike the companies mentioned above that have a more diversified business, they do not refine or transport oil. All they do is pull it out of the ground and sell it, which is much less capital intensive. As a result, many exploration and production companies will benefit from the rising oil prices without incurring some of the inflated input costs that other companies incur.
Two names that match this profile are Ovintiv Inc. and Marathon Oil. While each pays a more modest dividend (around 1.5%), both have much better cash-flow prospects, which can translate into higher returns for shareholders over the longer term.
Another company to consider is Suncor, a Canada-based oil producer with a relatively low valuation, strong balance sheet and good dividend. It is not directly listed on any US exchange but is accessible via US depository receipts. Murphy OilAlso worth considering, has just partnered with Exxon on a project based in Brazil that could boost the stock price by 20% to 40% over the next year.
Meanwhile, BP can be the pick of the ages, offering investors the best of both worlds: strong dividends (4.77%) and strong cash flow.
Let’s face it: Some energy companies can be hard to like. None of them enjoy brand loyalty, such as Apple, Disney or Nike. And some have been held responsible for accidents that have devastated local ecosystems and economies.
In fact, the banking sector – which is blamed by many publics for blowing up the global economy that led to the financial crisis – has a lot to offer. higher favorite rating.
However, with interest rates set to rise, many of the market sectors that have driven portfolios in recent years could start to take a hit, most notably tech companies with large margins. high number. As a result, advisors will have to look to profit in other areas, and in the current environment energy could be the place to go, regardless of any insecurities that may be caused to them or their clients. their goods.
– By Andrew Graham, founder and managing partner of Jackson Square Capital
https://www.cnbc.com/2021/12/14/here-are-some-energy-companies-that-investors-should-consider.html Here are some energy companies that investors should consider