Could Now Be A Good Time To Invest In Energy Stocks?
During the onset of the coronavirus pandemic, energy stocks were one of the sectors investors were avoiding at all costs. Not only has the novel coronavirus disrupted the supply chain and sapped demand, but it has also resulted in extreme volatility in oil and gas prices. Not sure if you remember, but the fears of oversupply and lack of storage in April did drive WTI oil futures into the negative territory for the first time in history.
However, top energy stocks are expected to be on investors’ radar after strong gains in commodity prices. Not to mention that investors were also hopeful that global vaccine rollout would accelerate economic recovery faster than previously expected. Expectations of a strong rebound in demand as economies recover have pushed oil to a one-year high, breaking the $60 mark. The jump in oil prices could also be due to the tensions in the Middle East and a cold snap in parts of the U.S.
The recovery in commodity prices is signaling that things may not be as dire as they were several months back. And that has analysts excited about the potential of top energy stocks in the stock market today. With many commodities prices soaring this week, analysts are also eyeing BHP Group (NYSE: BHP) and Rio Tinto Group (NYSE: RIO) closely. Now, these two companies are enjoying the tailwinds of strong commodity prices. With all that in mind, which is a better energy stock to buy now?
BHP Group is one of the largest diversified natural resources companies in the world. The company owns a diverse portfolio of world-class and low-cost operations across the globe. While it has exposure to a wide range of commodities, the key one right now is iron ore.
This week, the company delivered exceptional results in the first half of 2021. Revenue came in at $25.64 billion, higher than $22.29 billion a year ago. What’s more, the company also declared a record half-year dividend of $1.01 per share.
“The bulk of our BHP Billiton fair value estimate derives from just three commodities: iron ore, copper, and petroleum, in broadly equal contributions of approximately one-third apiece. Coking coal is a minor contributor. As commodity prices tend to move in unison, our valuation scenario uses high, low, and baseline prices. We don’t split individual commodities out. Our price scenarios also factor in currency, operating, and capital cost adjustments.” – Mathew Hodge, director at Morningstar
What Has Happened To BHP Stock Recently?
Since November 2020, BHP stock has gained more than 45% to date. Sure, a number of things have happened which helped explain its rise in stock price. Amongst them, the price of iron ore holding up relatively well would probably be the most obvious reason. Apart from the improvement in the price of the commodity, the company also announced that it had met licensing requirements to restart operations in Brazil, and has commenced iron ore pellet production.
“BHP‘s portfolio mix and quality stand out among peers. The low-cost position of its assets enables the company to generate FCF yield even in a stress scenario. It maintains a strong B/S, giving flexibility to pursue growth and/or increase cash shareholder returns, in particular given the company’s net debt target of US$12-17bn (post IFRS16 adjustment) vs FY20 levels of US$12.5bn. Spot FCF yields are comparable to peers, even without contributions from the Petroleum division, thus implying long-term optionality to a potential oil price recovery. We prefer BHP on a relative basis, given its attractive commodity mix ex-Iron Ore and free optionality on a potential oil price recovery.”- Alain Gabriel, Equity Analyst at Morgan Stanley
Rio Tinto Group
Another company to benefit from a surge in iron ore prices is Rio Tinto Group. For those unfamiliar with the energy sector, Rio Tinto is the world’s second-largest metals and mining corporation, just behind BHP. Apart from iron ore, the company also produces copper, diamonds, gold, and uranium. Rio Tinto is slated to report its earnings on February 17. With the price of iron ore still on fire, the Australian Financial Review reported that a record dividend payout is expected from Rio Tinto. Consensus forecasts are predicting a $4.20 interim dividend.
As of January 28 this year, the company announced the appointment of a new executive team. Commenting on his appointment, Jakob Stausholm said:
While Rio Tinto continues to deliver strong safety and operational performance, despite the ongoing challenges of COVID-19, there are improvements we can achieve across the business to make Rio Tinto more resilient, and an even stronger performer and employer. I want to re-establish Rio Tinto as a trusted partner for host communities, governments and other stakeholders.
Partnership With Palantir Technologies
Last month, Palantir (NYSE: PLTR) said it had signed a multi-year agreement to provide its Foundry platform to the company. Palantir’s software will integrate raw data from a multitude of disparate sources into a representation of critical mining operations. Following that, Rio Tinto will be able to make decisions and take actions using a single source of truth that combines operational and transactional data.
“This partnership is an important step in our digital transformation; enabling fast-paced, forward-looking decision making across our operations leading to improved results in safety, cost, and production,” says Fay Cranmer, Rio Tinto’s CIO. “We are excited to work with Palantir in the collaborative delivery of digital products, with best-in-class data technology.”
BHP Stock Or RIO Stock?
By and large, both BHP stock and RIO stock could be a great option for investors. That is if you believe the price of iron ore can continue to hold up. Since the margins for these companies will easily be eroded should the price of iron ore go south, many investors continue to tread this space with caution. While there’s a risk for that, China’s strong appetite for iron ore to support its infrastructure should keep prices elevated in the foreseeable future.
Both companies offer passive income to shareholders. Also, they are top diversified miners with high-quality assets. BHP stock may be the top dog today when it comes to mining companies in the stock market today. But investors should also watch Rio Tinto closely especially when it is stepping up in the use of data analytics. That could allow it to achieve an overall improvement in business operations over time.