Don't Miss the Long Haul; Ignore Volatility
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investing is a stressful activity. Daily price changes and quarterly earnings give enough information and activity to keep you glued to your computer all day. The energy markets are constantly filled with surprises and the latest doomsday story.
The chart below shows two different measures of volatility; one for oil, and one for the S&P 500. There have been huge spikes in volatility, yet the broad stock market has kept on growing. Over the past five years, the S&P 500 total return index is up 27.09%. The world needs a consistent supply of energy. Focusing on strong and secure energy firms gives investors a steady flow of profits without the stress of the news cycle.
Where to Invest
If you want to invest for the long haul, then you need a company that thinks the same way. ExxonMobil (NYSE: XOM) is one of the most powerful integrated oil companies -- and with good reason. The company has a number of upstream projects, including the Kearl project in Canada's oil sands. Replacing reserves is not easy for companies of this size, and in 2012, overall upstream volumes did decrease by 5.9% relative to 2011. At the same time, downstream earnings helped to even things out and improved margins increased earnings by $2.6 billion.
A good mix of downstream and upstream assets is critical to maintain earnings in the midst of volatile commodity prices. Exxon's diversity helps to allow you, the investor, to sleep sounder. The company has almost no debt, with a total debt-to-equity ratio of 0.07. Its yield of 2.5% isn't very large, but with a 22% payout ratio, the company is trying to be prudent and save enough for capital investment. ExxonMobil is a solid company with decades of experience. For long-term investors, it is a great firm to consider buying.
Suncor Energy (NYSE: SU) is a Canadian firm that is heavily involved in the oil sands. Currently the fourth stage of their Firebag project in the oil sands is being developed, which should provide some of the volume to boost total upstream production from Suncor's current 549,000 barrels of oil equivalent per day to the 570,000 BOE/D - 620,000 BOE/D goal in 2013. Suncor's also involved with Exxon's Hebron project off the coast of Newfoundland. The majority of firms in the oilsands are forced to take steep discounts because of the lack of transportation to get heavy oil to refineries. Suncor's company's mix of upstream and downstream assets help to get good prices for their heavy oil.
The firm has a healthy debt load with a total debt to equity ratio of .26. Their profit margin of 12.3% and gross margin of 53.4% give the firm room to breathe. Suncor isn't as famous as Exxon, though it is still a good company with diversified operations.
Phillips 66 (NYSE: PSX) is a recent spin off from ConocoPhillips. In the name of clarifying their corporate strategy, Philips 66 was created to focus on the midstream and downstream businesses. For investors who are looking for stable investments, a midstream and downstream firm offers much more stability than a purely upstream firm. Refining makes up around half of net income, but Phillips 66 plans to expand their midstream and chemical segments to bring down refining to a third of net income.
Their debt load is reasonable for the industry, with a total debt to equity ratio of 0.39. Their ROI of 19.4% and a ROA of 10.4% are healthy, but ExxonMobil has a stronger overall numbers. Analysts expect 2013 earnings to come in around $7.20 per share, which means you can pick up the company for a forward PE ratio under 10. As an individual stock Phillips 66 is new and not that well known.
Getting past the stress of the news cycle isn't easy. Still, there are some companies which are not exposed to massive risks and work great as stable long term investments. The large integrated oil companies like Exxon use their mix of upstream and downstream assets to stabilize earnings. Suncor isn't as large as Exxon, but it has a good mix of assets and is based in a very stable nation. Phillips 66 operates in the midstream and downstream sectors, which are inherently more stable than the volatile upstream world. For more adventurous investors, Suncor and Phillips 66 are good options. ExxonMobile's decades of experience make it a good option for more conservative investors.
MrCanadian1 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!