Following a plethora of jumps and drops, the S&P 500 index posted negative returns last year. The benchmark – which rose 9% during the first three quarters of the year – ultimately logged more than 6% losses in 2018. While the autumn sell-off has been blamed on myriad woes, including weaker earnings growth, stalemate on the trade front with China, Fed rate hike, partial government shutdown, slowing global economy, among others, oil prices, perhaps, remains the biggest worry.
Energy: The Worst Performing S&P Sector
Energy investors took it on the chin last year, as the Zacks Oil - Energy sector fell around 20%. WTI crude (the American benchmark) closed the year at $45.41 a barrel, while natural gas ended 2018 at $2.94 per MMBtu.
With oil plunging to a 17-month low of $42.53 a barrel on Christmas Eve, it comes as no surprise that the sector dominates the S&P’s laggards list this year.
While crude has been a major drag on stocks, natural gas has fared much better. While the heating fuel too took investors for a wild ride in 2018 – especially over the last two months – the commodity ended the year just below where it started for a small 0.4% annual loss.
Let’s discuss the 2018 performance of oil and gas in more depth, plus what to expect in 2019.
Supply Side Woes Plague Oil Market
A steady increase in the price of U.S. oil over the last two years culminated in the benchmark popping above $76 per barrel in early October, the highest level in nearly four years. Supply-side shocks out of Iran, Venezuela and Libya in the face of growing global consumption levels — especially in emerging markets such as China and India — put the oil market in a fundamentally tight spot.
Then, in a stunning reversal, oil faced a two-pronged attack: rising supply from major producers and fear that an economic slowdown will dampen the outlook for demand. Oil’s troubles helped send the index into a tailspin, leading to a 40% drop from October highs. Even the OPEC-led supply cuts look unlikely to end the market surplus.
Global oil supplies are looking plentiful and are expected to outstrip demand at the beginning of 2019. Predictions of more crude coming to the supply side through record production in the United States have added to the bearish sentiment on the market. Even the demand side looks jittery with OPEC forecasting weaker consumption.
Natural Gas Still Supported by Robust Growth Narrative
Natural gas futures, which, in November, crossed the $4 per MMBtu mark for the first time in four years, plunged 36% in December on bearish weather predictions. But importantly, unlike oil, the fundamentals of natural gas continue to be favorable.
Despite skyrocketing production, the current storage remains well below benchmarks. At 2.725 trillion cubic feet (Tcf), natural gas inventories are roughly 19% under the five-year average and the year-ago figure.
The demand for cleaner fuels and the commodity’s relatively lower price has catapulted natural gas' share of domestic electricity generation to 35%, from 25% in 2011. Moreover, new pipelines to Mexico, together with large-scale liquefied gas export facilities have meant that exports out of the U.S. are set for a quantum leap. Finally, higher consumption from industrial projects will likely ensure strong natural gas demand.
2019 Expected to be Another Tumultuous Year for Energy Investors
There are too many variables to make an educated guess as to the price of oil and natural gas going forward. In fact, more wild market swings appear imminent in 2019.
As evident from the energy market story, stocks can take a sudden turn for the good (or bad), making stock picking a risky game. Every good stock also has its bad day, which further adds to the risk.
Dividend Investing to the Rescue
With uncertainty ruling the markets, it is not surprising that dividend investing has emerged as one of the most popular investing themes.
Dividend stocks are always the investors’ preferred choice as they provide steady income and cushion against market risks. These stocks – displaying solid financial structure and healthy underlying fundamentals – are generally less volatile in nature and hence, are dependable when it comes to long-term investment planning. Moreover, they are proven outperformers over the long term and a safe bet to create wealth while offering sizable yields on a regular basis.
How to Pick the Best Stocks?
Although the benefits of dividend investing cannot be stressed enough, one should keep in mind that not every company can keep up with its dividend paying momentum. Hence, a cautious strategy needs to be followed in order to select the best dividend stocks with potential for steady returns.
To guide investors to the right picks, we highlight five stocks that carry a Zacks Rank of #1 (Strong Buy) or #2 (Buy). Finally, the stocks, which we shall cherry-pick, offer current dividend yield of more than 5%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Most of them are energy infrastructure master limited partnerships (or MLPs). The assets that these partnerships own typically – oil and natural gas pipelines and storage facilities.
MLPs represent an attractive investment option for income-focused investors in the current environment. In addition to high yields, MLPs are structured as pass-through entities.
This means that they typically distribute nearly all of their cash flows back to unitholders. The MLPs are not required to pay a corporate income tax as the tax liability of the entity is passed on to its owners (or unitholders) in the form of a cash dividend (distribution). This allows the MLPs to offer very attractive yields to the investors.
5 Energy Stocks to Invest In
Shell Midstream Partners, L.P. (SHLX - Free Report) : Shell Midstream Partners is a partnership formed by Royal Dutch Shell plc (RDS.A - Free Report) to own, operate and develop its pipelines and other midstream assets. The Houston, TX-based stock currently carries a Zacks Rank #1. Shell Midstream Partners is paying out a quarterly distribution of 38.2 cents per share at the moment, with a distribution yield of 8.9%.
Valero Energy Partners LP : Valero Energy Partners is the publicly traded arm formed by Valero Energy (VLO - Free Report) to own the pipelines and terminals assets of the parent. The San Antonio, TX-based stock currently carries a Zacks Rank #1. Valero Energy Partners is paying out a quarterly distribution of 55.1 cents per share at the moment, with a distribution yield of 5.2%.
CrossAmerica Partners LP (CAPL - Free Report) : CrossAmerica Partners is a wholesale motor fuel distributor in the East Coast and Midwest. The Allentown, PA-based stock currently carries a Zacks Rank #1. CrossAmerica Partners is paying out a quarterly distribution of 52.5 cents per share at the moment, with a distribution yield of 14.3%.
Archrock, Inc. (AROC - Free Report) : Archrock is a leading player in the natural gas compression and transmission business. The Houston, TX-based stock currently carries a Zacks Rank #2. Archrock is paying out a quarterly dividend of 13.2 cents per share at the moment, with a dividend yield of 6.6%.
MPLX LP (MPLX - Free Report) : MPLX is a subsidiary of Marathon Petroleum and one of the biggest petroleum pipeline networks in the U.S. The Findlay, OH-based stock currently carries a Zacks Rank #2. MPLX is paying out a quarterly distribution of 63.75 cents per share at the moment, with a dividend yield of 8.3%.
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