Stocks in the energy sector have been hit hard amid the COVID-19 pandemic. As economies were shut the demand for crude oil and other commodities slumped and prices touched multi-year lows. The oil price war between Saudi Arabia and Russia added fuel to fire and exacerbated the sell-off.
Which stocks gained momentum last month?
The lower crude oil prices meant oil production was unprofitable and the fear of massive losses was the primary driver of the sell-off in the energy space. Several companies reduced or suspended their dividends to maintain liquidity and tide over these uncertain times.
However, as the world is limping back to normalcy, the demand for oil is stabilizing which has increased its price to $45 per barrel, up from just $20 in March. The development of effective vaccines and the recovery in oil prices drove energy stocks higher in November.
Shares of Occidental Petroleum (NYSE: OXY), Devon Energy (NYSE: DVN) and Diamondback Energy (NASDAQ: FANG) were up over 70% in the last month. Comparatively, large-cap energy players such as Chevron (NYSE: CVX) and Exxon Mobile (NYSE: XOM) soared by 32% and 24% respectively in November.
What are the two energy plays right now?
While the recent gains might attract investors, you should know that most energy companies are still a high-risk investment. This means you need to identify quality companies with strong financials such as Conoco Philips (NYSE: COP), a diversified oil and gas producer.
The company operates deepwater wells, oil sands production as well as LNG (liquified natural gas) production facilities. It enjoys a low-cost production structure and has a low leverage ratio as well as an investment-grade balance sheet.
Conoco Philips recently agreed to acquire Concho Resources (NYSE: CXO) in an all-stock merger valued at $9.7 billion or $13 billion after including the latter’s outstanding debt. The combined entity is expected to generate $500 million in cost savings by 2022 and return 30% to shareholders in dividends and stock buybacks.
Conoco Philips has a forward yield of 4.4% and has a cash-rich balance sheet, making a dividend cut highly unlikely.
Kinder Morgan remains attractive for the income investor
At a time when interest rates are nearing all-time lows, it makes sense to hold a portfolio of quality dividend-paying stocks. One such company is midstream giant Kinder Morgan (NYSE: KMI) that owns and operates 38,000 km of pipelines with a portfolio of 180 terminals across North America.
Shares of Kinder Morgan have lost over 45% in market value since February which means its dividend yield is a tasty 7.3%. Midstream companies such as Kinder Morgan expand by growing their assets and use this cash flow to pay dividends to shareholders.
This robust business model helped Kinder Morgan increase its dividends by 5% in 2020. The company generates a steady stream of cash flows derived from its fee-based pricing model which insulates earnings from price fluctuations.
With a payout of less than 50%, Kinder Morgan generates enough cash to pay dividends and reinvest in expansion projects. Its strong balance sheet, stable cash flow, and attractive valuation make Kinder Morgan compelling for dividend and value investors.
You can visit Finscreener’s dynamic dividend dashboard here. This tool allows investors to look for dividend-paying stocks.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
