Are Energy Stocks Finally a Buy?

Is this the time to buy a basket of energy stocks?

Yes. Though I should start by stating the obvious: We are awash in oil, and this market looks to be oversupplied for quite some time. On Thursday, the Energy Information Administration rattled energy stocks by reporting that U.S. crude inventories just saw their highest weekly jump in at least 14 years.

Still, this is not the first time we’ve seen a bust in the oil patch. We will almost certainly see business failures as high-cost and highly indebted shale producers go belly up. But the beauty of an ETF like XLE is that it is dominated by mega-cap supermajors and pipeline operators—the kinds of companies with the balance-sheet strength to buy productive assets on the cheap if we do see forced selling.

Let’s take a look at the energy stocks that dominate XLE’s portfolio.

XLE Top Ten Holdings

CompanySymbol% Assets
Exxon Mobil CorporationXOM16.63%
Chevron Corporation CVX13.63%
Schlumberger N.V.SLB7.22%
Kinder Morgan, Inc. KMI4.51%
ConocoPhillipsCOP3.95%
EOG Resources, Inc.EOG3.87%
Occidental Petroleum OXY3.43%
Pioneer Natural Resources PXD3.16%
Anadarko Petroleum APC3.06%
Williams Companies, Inc.WMB2.68%

 

At the top of the list is, of course, that juggernaut of all oil supermajors, ExxonMobil Corp (XOM). Exxon accounts for 16.63% of XLE’s portfolio.

Exxon will take its licks when it reports earnings. Consensus estimates have Exxon’s earnings dropping by about 29% when it reports. Yet Exxon’s dividend is more than adequately covered, and it’s worth noting that Exxon has raised its dividend for 32 consecutive years. Yes, even during the dark days of the 1980s and 1990s, when crude oil traded at generational lows, Exxon managed to keep growing its dividend. Furthermore, at 3.0%, Exxon is a relative high yielder in a word in which the 10-year Treasury yields just 1.9%.

Moving on, Chevron (CVX) makes up another 13.63% of XLE’s portfolio. Chevron has raised its dividend for 27 consecutive years and currently yields 3.9%. Like Exxon, Chevron’s dividend is more than adequately covered. The dividend payout ratios for Exxon and Chevron are 33% and 38%, respectively. There is a lot of room for crude oil prices to go lower before either of these stocks see their dividends at risk.

Schlumberger (SLB) takes the third spot, at 7.22%. As an oil services company rather than a supermajor, Schlumberger is riskier than Exxon or Chevron. As oil companies slash exploration, the service providers stand to absorb more of the loss in revenue. That’s ok. Schlumberger has lived through its share of both energy bull markets and bear markets, and it’s still here to tell the story. I wouldn’t aggressively buy Schlumberger as a stand-alone stock right now, but its 7.22% weighting here is more than acceptable.

I really wish that Kinder Morgan Inc (KMI) has a larger weighting than its current 4.51%. Kinder Morgan is one of the biggest and best-capitalized pipeline operators in the business, and I fully expect Kinder to go on a buying spree if some of its weaker competitors go bust. It’s worth noting that company founder Richard Kinder started the company by buying unwanted pipeline assets from Enron for a song. Long after Enron bit the dust and became a byword for all that is wrong with corporate American, Mr. Kinder’s creation is going stronger than ever.

Has the price of crude oil finally hit bottom? Probably not. But I’m ok with that. Energy stocks remain one of the few cheap sectors in an otherwise expensive market, and XLE provides a fine way to get exposure to the biggest and best.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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