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The Pros and Cons of Investing in Energy Stocks in 2020

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  • (0:30) - Oil Takes A Huge Hit: Are There Any Deals?
  • (5:45) - E&P Companies To Keep Your Eye On
  • (10:05) - What Could Be The Positives That Come From This Downturn?
  • (22:00) - Episode Roundup: PXD, SLB, AR, CHK, CRK, EQT, LPI, OAS, RRC, OEG
  •     Podcast@Zacks.com

Welcome to Episode #222 of the Zacks Market Edge Podcast.

Every week, host and Zacks stock strategist, Tracey Ryniec, will be joined by guests to discuss the hottest investing topics in stocks, bonds and ETFs and how it impacts your life.

This week, Tracey is going solo to talk about the energy stocks.

They’ve been pummeled in the coronavirus sell-off with some stocks trading at 20-year lows.

What are the pros, and cons, of buying energy stocks this year?

The Cons of Buying Right Now

The elephant in the room is that some of the energy companies may not make it. This is the biggest “con” of buying the stocks right now.

Many have a lot of debt and now they will have little revenue coming in.

Whiting Petroleum has already filed for bankruptcy. Will others be next?

There are 7 exploration and production companies that have high leverage. Two of those are the following:

1.       Chesapeake Energy CHK has a market cap of just $149 million. Be careful of the smallest players. It’s expected to see negative earnings for the second year in a row.

2.       Comstock Resources CRK has a market cap of $1.39 billion and is trading over $5. Earnings are expected to fall 49% but it does have a forward P/E, which is currently 18.

A second “con” to buying right now is that it’s going to be at least a year, maybe longer, before investors will see revenue and/or earnings growth.

Are you willing to wait for revenue to turn around while other companies in other industries won’t have the same problem?

The Pros of Buying Energy Right Now

The biggest “pro” to buying is that energy stocks are cheap.

Look at services provider Schlumberger SLB. Shares are down 84% over the last 5 years.

Is the worst-case scenario already priced in in those shares?

Schlumberger just cut its dividend by 75% to save cash, but it is still paying a dividend despite the energy industry mayhem, which says a lot. That dividend is currently still yielding 3.3%.

A second “pro” is that, because it’s the most hated sector, the stocks could see a big bounce back once earnings start to recover.

Look for the winners among the explorers.

Two companies with low leverage:

1.       Pioneer Natural Resources PXD shares are down 53% year-to-date and are near 5-year lows. But it has the best balance sheet in the industry which will serve it well through this difficult year.

2.       EOG Resources EOG has more than $2 billion in cash and analysts expect it to have positive free cash flow in 2020. It’s still paying a dividend, yielding 3.6%.

What else should you know about investing in energy in 2020?

Listen to this week’s podcast to find out.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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