Crude oil prices have dropped significantly since early June, and energy stock prices have matched or exceeded the decline.
Yet energy commodity prices remain very high, and the supply/demand imbalances point towards higher prices later in the year.
Now is the time to invest in all three of the energy subsectors. Here’s my favorite way to buy the energy dip.
In early June, the price of a barrel of WTI crude oil peaked at just above $120.00. Now in mid-July, oil trades for about $95 per barrel – a 20% decline over a handful of weeks. Remember that oil started the year at $76 and traded in the low $60s a year ago. With oil at $85 to $100, energy companies are hugely profitable.
I expect that energy prices will again move higher – possibly much higher. Last week Bloomberg reported this:
A global squeeze on energy supply that’s triggered crippling shortages and sent power and fuel prices surging may get worse, according to the head of the International Energy Agency.
“The world has never witnessed such a major energy crisis in terms of its depth and its complexity,” IEA Executive Director Fatih Birol said Tuesday at a global energy forum in Sydney. “We might not have seen the worst of it yet – this is affecting the entire world.”
The recent decline in oil is due to the off-again, on-again pandemic lockdowns in China. When the Chinese government finally unleashes its citizens and economy, the world will quickly go to a shortage of crude. Oil may set new price records in the coming months.
When it comes to energy stocks, I like to find those with generous dividend policies. I want to share in profits in the form of cash dividends. If crude oil stays at current levels, the stocks I pick will pay very attractive dividends. If crude rises, dividends could be massive.
Here are three investment ideas from the three energy subsectors. Each subsector has its own fundamentals, so investments should be evaluated based on a business’s activities.
Upstream energy companies are your well drilling companies. This sector is directly exposed to changes in crude oil and natural gas prices. Out of this group, I like royalty companies, which own production rights for dedicated acreage. These companies don’t have to worry about exploration and drilling expenses, yet still get a percentage of every barrel produced. Recently, I added Brigham Minerals, Inc. (MNRL) to my Dividend Hunter recommendations list. MNRL pays variable dividends and yields 10% based on the dividend paid in May. I expect the company to declare a significantly larger dividend for August.
Energy midstream companies are your gathering, processing, storage, and transport companies. Businesses in this group own pipelines, terminals, and storage facilities. Midstream companies have stable revenue streams and pay stable dividends. The share prices will still fluctuate with the broader energy sector. Crestwood Equity Partners LP (CEQP) is a high-yield MLP with growing free cash flow that currently yields 8%.
Downstream, you have your crude oil refiners. These companies distill crude oil into gasoline, diesel, and jet fuel. Refiners’ profits swing with the crack spread, which is the difference between the cost of crude oil and the value of the produced fuels. Refiners don’t pay big dividend yields, but you can expect significant dividend growth over the next couple of years. Phillips 66 (PSX) increased its dividend by 5% in May. PSX was the first of the larger refiners to restart dividend growth coming out of the pandemic. PSX currently yields 4.5%.
On July 20, I will host a seminar for my Dividend Hunter Insiders members with a deep dive review of how the energy sector operates. I will show them what makes me confident these are the stocks I want to own. To join, make sure you’re a Dividend Hunter and Dividend Hunter Insiders member.
