As oil prices come down from its 2016 highs, so has the price of most energy stocks and Michael Berger, Associate Editor of MoneyShow.com, highlights his two favorite energy stocks before the companies report first quarter earnings after the market closes today.
Over the past eighteen months, energy investors have been whipsawed as extreme oil price volatility caused even more extreme stock price swings.
Following a two-month spike in oil prices, many energy stocks are trading near their 2016 highs and we expect to see near-term weakness as oil prices recently came under pressure.
While commodity price volatility should continue to act as a headwind, we continue to recommend incorporating energy stocks and MLPs into any diversified portfolio. Today, want highlight our two favorite energy stocks before they report first quarter earnings after the market closes today.
Top Pick in the Refining Logistics Space
Tesoro Logistics LP (TLLP) owns, operates, develops, and acquires logistics assets related to crude oil and refined products in the United States. We believe the refining logistics space provides attractive total return exposure to anticipated future domestic growth trends while being much less exposed to commodity price volatility.
We believe the current risk/reward profile for TLLP is very favorable. If fact, we see upside from current levels even if current crude oil headwinds persist. Its supportive parent company, Tesoro Corporation (TSO), provides excellent financial support. Tesoro Logistics has visible growth due to recent accretive acquisitions and dropdowns from TSO and offers investors a 7.1% dividend.
In the near-term, we see upside coming from an expected dropdown acquisition in 2016, coupled with the potential for even greater upside to emerge if crude oil prices continue to move higher.
Over the long-term, we view TLLP as one of the highest-quality growth stories in the MLP industry. We expect to see the company’s cash distribution grow by at least 15% every year, for the next three years.
Top Pick in the E&P Space
Concho Resources, Inc. (CXO) is our favorite exploration and production energy stock due to 1) its premier asset base in the Permian basin, 2) its positioning for another beat-and-raise performance during 2016, 3) its balance sheet offers capital flexibility, and 5) its valuation has improved as the shares fell 6.5% during the last week.
Concho owns approximately 535,000 net acres in the Delaware Basin/New Mexico Shelf, which is located in the Permian Basin. We believe that Concho owns some of the best acreage in the Permian Basin.
Over the last few years, Concho has been able to beat production and cost expectations on a consistent basis. We do not expect this theme to end during 2016. In fact, we believe that CXO will highlight its best-in-class operational capabilities.
The weak oil and gas price environment has made financial flexibility more important than ever. The only way a company can be financially flexible is by having a balance sheet to support it. Concho has a solid balance sheet with net debt/EBITDA of 1.8x.
CXO has outperformed many of its peers during 2016 and the shares are up more than 21% this year. The shares have fallen more than 20% since July 2014 and we continue to see long term value in Concho Resources.
