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All Contents © 2019The Kiplinger Washington Editors
By Aaron Levitt
| December 28, 2017
This past year has been a roller coaster ride to say the least. But for energy stocks and crude oil, the roller coaster has been particularly a rough ride. We're basically where we started 2017 in terms of prices. Supplies continue to be tight as OPEC and other major energy producers have started to clamp down hard. At the same time, better economic growth has driven up demand.
To that end, energy socks have continued to rebound after a big mid-year slump. The Energy Select Sector SPDR (ETF) (XLE) is up 11% since bottoming out over the summer. That has been driven by the better overall fundamentals.
With that, going into 2018, energy stocks should have another a decent year. But which ones should investors keep an eye on?
Here are five energy stocks that investors should watch in 2018 and certainly add to any watchlist to buy.
Prices and data are from the original InvestorPlace story published on Dec. 21. Click on ticker-symbol links in each slide for current prices and more.
Beaten down BP (BP) is not quite 100% back, but the firm is darn close—and it's getting closer and closer each day. Damages from the worst spill in history are finally beginning to wind down, while its continued focus on cost cutting and drilling in the most prolific/low-cost areas of the Gulf have finally begun to bear some serious fruit.
BP has finally begun to see rising production and even managed to see a profit at its E&P arm last quarter. New monster projects kicking into high gear soon will only help drive that production and revenues further.
This is great news for long-suffering shareholders. It has been a long time since we could mention something truly positive on the energy stock.
The icing on the cake was BP's recent buyback announcement and an end to its scrip dividend program. That means, management is confident in its cash flow generation ability that it can spend "extra" money on value-adding activities.
With energy prices still rising, BP could finally be 100% back in the New Year. For investors, that could make BP one stock to watch.
Like beaten down BP, beleaguered Chesapeake Energy (CHK) is one of the energy stocks investors need to keep an eye on in 2018. The year could be CHK's make or break moment—and that doesn't mean filing for bankruptcy.
Chesapeake still has a few levers to pull in order to keep itself going through the year, and oil prices have already started to move higher. That's great news for CHK, as the firm is soooooo close to being cash flow positive. One the other side of the production equation, natural gas is finally seeing rising demand. Both chemicals production and LNG exports have finally started to push demand in a positive direction. With colder temperatures finally hitting the Northeast, natural gas prices have finally started to rise in conjunction with the new sources of demand.
For CHK stock, this could finally be the real break it has been looking for. Ultimately, that will help on its cash flows and ability to pay down—and not just pay—its debts. And with those debts finally going away, we can officially put the bankruptcy talk away at Chesapeake.
Heading into 2018, CHK is definitely one of the biggest energy stocks to watch.
Halliburton (HAL) is still one of the biggest energy stocks out there. It's just that it has been quietly living under a rock for most of 2017. After its failed merger with Baker Hughes—now part of GE (GE)—HAL has been pretty quiet on the media front. The drop in energy prices over the summer didn't help either.
But for investors, that has been actually great.
In a nutshell, you can't frack without Halliburton. The company still has a commanding lead in pressure pumping services and other critical needs in the oil patch. And while E&P firms have pressured oil services stocks for low rates, HAL's technology for fracking is some of the best around. As a result, its margins weren't compressed as much as smaller rivals.
With oil rising, HAL is back on the prowl with higher profits and revenues. In fact, Halliburton saw its revenues jump by 42% in the third quarter and managed to swing to a profit for fiscal year 2017. And that has been great news for HAL stock—which has bounced back from its lows.
As oil continues to rise, Halliburton should be on everyone's watch or conviction buy list.
A 7% yield is a big yield. Perhaps too big. That's the story at one of the pipeline and energy midstream players Enterprise Products Partners (EPD).
Analysts have started to question the firm's ability to continue generating enough cash flow to boost growth and distribution at the firm. EPD has already guided to the fact that it plans on slowing its rate of dividend growth for the near future. That has some analysts questioning if being a lucrative master limited partnership (MLP) make sense anymore for the firm.
Like former MLP Kinder Morgan (KMI), EPD is so large that it's getting harder for it to expand meaningfully. It takes a big pipeline or set of assets to move the needle. And with that, it might be time to end the cycle of issuing new units to pay for growth while raising distributions.
For investors, the potential for EPD to drop the MLP structure is a monster story worth following. The tax effects, lower income potential, and string of changes to major MLP indexes could have a ripple effect. Enterprise hasn't officially announced that the change is coming, but there's a real possibility that it could.
As the largest independent refiner with 15 facilities, as goes Valero Energy (VLO), so goes the downstream sector. And that could be a great 2018.
Despite rising oil prices, margins at VLO have been surging. During its last reported quarter, Valero saw its gross refining and net refining margins leap to $10.90 and $5.50 per barrel. This compares to just $2.20 and $2 recorded during the same period a year ago. This margin expansion was a result of better crack spreads on crude oil at its facilities.
Going forward, those margins could continue to expand. Despite higher prices and the ill effects of hurricane Harvey, supplies shave continued to climb, albeit at a steady and slow pace. More importantly, those supplies are expanding near VLO's facilities. The reduced transportation cost has helped keep Valero's overall margins humming along.
The wildcard will be VLO's ethanol earnings thanks to new legislation in the works from the Donald Trump Administration. That cut demand in a big way.
For investors, crack spreads and ethanol make for an interesting energy stock to watch throughout the new year.
This article is from Aaron Levitt of InvestorPlace. As of this writing, Levitt did not personally hold a position in any of the aforementioned securities.
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