The extension of supply cuts from Saudi Arabia and Russia, coupled with a short-term decline in U.S. oil production from top shale regions, has sent oil prices soaring. November-dated crude futures (CLX23) are wavering ahead of the crucial Federal Reserve meeting today, but earlier this week rose to a series of new year-to-date highs.
As a result, the Energy Select Sector SPDR Fund (XLE) - a popular ETF that tracks the performance of top energy companies - has rallied more than 17% over the last three months. In the same time frame, the S&P 500 SPDR (SPY) has added less than 2%.
That said, the best oil and gas companies offer much more than exposure to energy prices. With this in mind, here's a look at three fundamentally strong picks, highlighted by their strong operational and execution capabilities - all of which offer above-average dividend yields for steady income throughout macroeconomic cycles.
Enterprise Products Partners
Founded in 1968, Enterprise Products Partners (EPD) is one of the largest midstream energy companies in North America. EPD provides services to both producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals. It has nearly 50,000 miles of pipelines with over 260 million barrels of storage capacity.
The company currently commands a market cap of $58.61 billion and offers an impressive dividend yield of 7.24%, which is higher than the sector median of 3.40%. In fact, EPD has increased its dividend for 24 consecutive years.
Shares of EPD are up 19.4% year-to-date, outperforming the XLE's return of 7.6% over this time frame.
For its latest quarterly results, Enterprise Products reported revenues of $10.6 billion, down 33.7% from the previous year. EPS fell to $0.57 from $0.64, and failed to top the consensus estimate of $0.57. This is the only instance out of the past five quarters where the company's EPS did not surpass the Street's expectations, pressured by lower natural gas prices during the first half.
However, production volumes were higher across some key segments. NGLs, crude oil, refined products, and petrochemical pipeline volumes increased by 7.6% yearly to 7.1 million barrels per day, while natural gas pipeline volumes also rose from the prior year.
Although EPD reported a drop in distributable cash flows for the April-June period - to $1.7 billion from $2 billion in the previous year - it has a distribution coverage ratio of 1.8. This metric hasn’t fallen below 1.5 since 2017, pointing to the company's income-generating capabilities, as well as its solid distribution to shareholders.
Analysts have handed out a “Strong Buy” rating on the stock, with a mean target price of $31.46. This indicates an upside potential of about 15.6% from current levels. Out of 12 analysts covering the stock, 11 have a “Strong Buy” rating and 1 has a “Hold” rating.
Coterra Energy
Based out of Houston, Texas - and established in 1989 as Cabot Oil & Gas Corporation - Coterra Energy (CTRA) emerged in its current form in 2021. Coterra is a leading independent oil and natural gas company, with interests in the Permian Basin, the Delaware Basin, and the Anadarko Basin.
The company's market cap currently stands at $20.79 billion, and CTRA offers a dividend yield of 5.99%, which comfortably outpaces the sector median.
Coterra Energy stock has gained 16.3% on a YTD basis, outperforming the XLE by a wide margin.
In its latest results for the second quarter, Coterra's operating revenues slid by 54% from the previous year to $1.2 billion, while adjusted EPS fell to $0.39 - surpassing the consensus estimate of $0.34. Coterra has reported EPS above consensus expectations in each of the past five quarters.
Production rose across the natural gas, NGL, and oil segments, with daily equivalent production up 5.3% to 664.9 MBOE/d for the period. Plus, the company raised its full-year production guidance by 2%-3%.
Plus, even after the company reported an 89% YoY decline in free cash flow, net long-term debt actually declined marginally to $2.17 billion at the end of the quarter, down from the beginning of the year.
Analysts remain cautiously optimistic about the stock, with a “Moderate Buy” rating and a mean target price of $31.88 - which indicates expected upside potential of about 16.6% from current levels. Out of 19 analysts covering the stock, 9 have a “Strong Buy” rating and 10 have a “Hold” rating.
Williams Companies
We'll finish up with the oldest name on the list, Williams Companies (WMB). Williams was founded in 1908, and is headquartered in Tulsa, OK. It is a natural gas midstream operator with over 30,000 miles of pipelines in operation. Williams also owns and operates natural gas processing and storage facilities, as well as LNG export terminals.
Its current market cap stands at $41.71 billion, and its dividend yield of 5.16% is beyond the sector median.
The share price for Williams is up 9.4% so far in 2023, edging out the XLE's own relatively tepid performance.
In Q2 2023, Williams reported revenues of $2.483 billion, down marginally from the previous year. Adjusted EPS for the period came in at $0.42, up 5% from the previous year and above the consensus estimate of $0.39. Further, just like Coterra, Williams has reported EPS above the consensus estimate in each of the past five quarters.
Additionally, along with increasing its adjusted cash flow from operations (up 25% YoY), the company reduced its long-term debt to $21.5 billion, down from $21.9 billion at the beginning of the year.
The company's production levels also ticked higher, as gathering volumes increased by 6% from the previous year to 18.03 Bcf/d.
Analysts have given out a “Moderate Buy” rating on the stock, with a mean target price of $37.47 - which indicates upside potential of about 8.7% from current levels. Out of 19 analysts covering the stock, 7 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating, and 9 have a “Hold” rating.
