2 High Quality Energy Stocks for the Income Investor
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It’s no secret that there is currently a lot of political turmoil worldwide, which has caused commodity prices to soar, specifically crude oil (NYSEMKT: USO). Iran is threatening to possibly block the Straits of Hormuz, where anywhere from 20-40% of the world’s oil passes through daily, and even a viable threat of this would cause oil prices to almost surely reach new highs. Other Middle-Eastern oil rich countries continue to have problems establishing their governments after last year’s “Arab Spring,” and there are still the never-ending tensions with oil-rich Venezuela. So, as an investor what should one do? I believe investing in high quality energy names allows us great protection and I find that in both ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX).
ExxonMobil engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. XOM currently is the largest company in the world in terms of market capitalization and has been in existence since 1870. Since that time, the company has simply been a paragon of operational excellence and today is no exception.
Earning over $40 billion in profits and $21 billion in free-cash-flow in 2011 alone, XOM looks poised to continue generating huge amounts of cash. In addition, management is wonderful in giving back to its shareholders as the dividend has been raised annually for decades and retired hundreds of millions of shares. The company currently looks favorably priced even near its highs at just a trailing and forward 10x Price/Earnings, 1x Price/Sales and Enterprise Value/Sales, 6x Enterprise Value/EBITDA, and respectable 2.2% consistently growing dividend. I think XOM is a great holding for 2012 and a name that will benefit as energy prices stay elevated with the political uncertainty for the foreseeable future.
Chevron Corporation, through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. CVX is not too shabby in size as well with a market capitalization in excess of $210 billion and been in existence since 1879. CVX has also been a model of excellence and currently has very favorable valuations of just an 8x trailing and forward Price/Earnings, 1x Price/Sales and Enterprise Value/Sales, just over 4x Enterprise Value/EBITDA, great free-cash-flow this past year in excess of $11 billion, and consistently growing 2.9% dividend yield.
I like CVX slightly more than XOM due simply to the cheaper valuations, but I think it would be wiser to split one’s position between the two to offset company specific risk and the fact they both trade at very nice valuations.
The author doesn't own any shares in the companies mentioned.