Top 3 Cheapest Energy Stocks to Buy Now? (2019 Review)
Today we’ll look at one of the most vital sectors in the global economy: the cheapest energy stocks in the stock market.
Energy stocks are a mandatory holding in any serious portfolio. Energy stocks are something I consider “must-owns” because they represent companies that have a central part in every day human life.
There is no human life without energy, thus energy products will always be needed. That means investing in energy stocks must be a core part of your investing strategy.
Because oil prices have fallen significantly, now is a good time to buy the cheapest energy stocks in the market.
The Cheapest Energy Stocks For 2019
If you’re in a hurry, below are our picks for the lowest priced energy stocks as of this writing.
- Schlumberger: The leading name in oil services.
- HollyFrontier: The leading petroleum refiner with great cash flow.
- BP, plc: Still hated by investors for no good reason.
Keep reading and you’ll find out more about these inexpensive energy stocks and my thoughts on each.
What Are Energy Stocks?
By energy stocks I refer to companies that handle fossil fuel derivatives, not “alternatives”. I consider alternative energy to be a generally terrible investment. Fossil fuels will always provide the vast majority of our energy, and so I suggest you only concentrate on those stocks.
There are many different kinds of energy stocks. They are subdivided into three categories: downstream, midstream, and upstream. Those each refer to a portion of the supply chain that exists for fossil fuel energy.
Downstream companies work with oil that has been taken out of the ground, and transported some distance. These companies take oil and refine it, turning it into heating oil, natural gas, liquefied natural gas, gasoline, and other consumer products. Some people consider companies that make plastics and other items derived from petroleum to be downstream companies.
Midstream companies take the oil from wherever it has been pulled from the ground and transports it to downstream operators. These are often referred to as oil service stocks, which is what I’m primarily looking at in today’s article.
Basically, if a company moves or stores any form of fossil fuel or derivative, it’s a midstream player.
Upstream companies handle the actual extraction of oil from the ground, as well as the exploring to find the black gold in the first place.
How Do You Determine What Qualifies As The Cheapest Energy Stocks?
The cheapest oil stocks have at least two of these three characteristics:
- Competitive EV-to-EBITDA ratios
- Not saddled with too much debt
- Positive cash flow on a regular basis
Competitive EV-to-EBITDA ratios
There’s a challenge with trying to value energy stocks against each other. That’s because energy stocks are beholden to a lot of factors that can alter their profits, and those factors can change very quickly.
Oil prices are the primary element that energy stocks are linked to, and oil prices are extremely volatile and unpredictable. In addition, economic cycles and trade issues will affect supply and demand for energy stock products and services.
So we can’t really use the standard P/E ratio. Instead, my metric is the EV-to-EBITDA ratio.
“EV” is short for “enterprise value”. That’s defined as “market capitalization plus debt, plus minority interest, plus preferred shares, less total cash and investments.”
EBITDA is just short for “cash flow”, or specifically, “earnings before interest, tax, depreciation and amortization”.
Then the issue is comparing the ratios of companies to each other to find the lowest number.
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Not too much debt
Upstream companies are usually the big famous names that you know of, like ExxonMobil. These companies tend to carry a lot of debt but they also have tons of cash and strong cash flow.
Energy stocks that are not upstream companies have to be much more careful about debt. Because they are one step removed from sourcing the actual oil, they are not in control of how much oil is moving around at any one time.
They can’t turn the spigot on and off. They are dependent on other companies to do that, which means they can’t take on too much debt and suddenly find that there isn’t any oil flowing for them to earn money off of.
Positive regular cash flow
This is a corollary to the debt issue. The cheapest energy stocks must have the cash flow to spend on a very capital intensive business, and enough cash flow to pay interest on whatever debt they do have.
If that cash flow falters for too long, they could go bankrupt.
Here’s a video that provides some additional information on investing in energy stocks.
What is it?
Schlumberger is the premier supplier to the energy exploration and production industry. It’s difficult to describe the complexity of exploring for oil and pulling it out of the earth, but there are tons of logistics and equipment involved. This is referred to as “Reservoir Characterization”.
Once all the information about an oil field has been crunched and analyzed, the company’s Drilling Group provides all kinds of equipment for the machinery that does the actual drilling.
The Production Group segment provides the well services themselves, like pumping and cementing, and so on.
You can learn more about this complicated work here.
What makes it a cheap stock?
Schlumberger is one the cheapest energy stocks for a few reasons. First, it struggled to recover from the 2015 crash in oil prices and is struggling again now as prices have fallen. It’s a good example of how even the best oil services companies are always in precarious positions.
But that’s exactly why we love times like these – when other investors are afraid, we can find value.
The company’s EV-To-EBITDA ratio 10.74, and that’s a fairly low number considering Schlumberger’s history.
Schlumberger tends to be fairly nimble with its debt load. It hit $16.4 billion at the end of 2016, and then paid it down to $14.88 billion by the end of 2017, and is now down to $14.16 billion.
The company has always generated positive free cash flow. In the best of times, it runs over $6.5 billion, and in current times, it still managed $1.6 billion in the past twelve months.
Read Also: What’re The Best Food Stocks?
What is it?
HollyFrontier specializes in refining, lubricants and has a specialty products division. It refines gasoline, diesel and jet fuel. It sells them to gas stations and convenience stores, railroads, paving contractors and commercial airlines. It does this through its 5 midwest refineries. It also makes and sells its lubricant products around the country.
What makes it a cheap stock?
HollyFrontier has been around since 1947, and is a leading refiner in the U.S. It has an ultra-cheap EV-to-EBITDA ratio of only 5.21. It was incredibly profitable during the period right before the oil price crash, generating $737 million in net income in 2015.
Then the low oil prices got them and created a $261 million loss the next year. Yet the company roared back in 2017 to an $800 million profit. It is now going gangbusters with $1.4 billion in net income the past twelve months.
It is doing so well that it can afford to take on more debt, now at $2.4 billion. I’m not concerned because net income is so high and free cash flow is $1.2 billion.
What is it?
BP may currently be best known for the Deepwater Horizon disaster. That’s too bad, because it is a world-class operator of the Upstream, Midstream, and Downstream energy business.
It’s also in a joint venture with Rosneft, Russia’s state-steered oil company, handling 13 refineries, and sending that refined gasoline to 3,000 services stations in Russia.
What makes it a cheap stock?
BP got hammered for many years, having to doll out tens of billions of dollars in restitution for the Gulf disaster. But that’s all behind it now.
Net income has exploded at the company, rising from $115 million in 2016 to $3.37 billion last year, and $3.49 billion in the past twelve months.
Free cash flow has roared back, so that BP can at least deal with debt service on its $54 billion debt load. That is the one thing I don’t like, but because the company earns interest on its $53 billion in investments, and has a cash hoard that exceed the debt, I’m not terribly worried.
Wall Street still doesn’t like BP, but at $39 per share – down from recent highs of $47 – it’s one of the cheapest energy stocks to pick up.