Portfolio manager shares his top oil, energy stock plays

Tortoise senior portfolio manager and managing director Rob Thummel joins Market Domination to discuss the best energy plays and how oil commodities (CL=F, BZ=F) may be affected by Hurricane Francine.

Thummel is bullish on energy infrastructure, explaining that it has performed "really well" this year while still trading at a discount relative to its historical valuation. He points to names like Williams Companies (WMB), Oneok (OKE), and Targa Resources (TRGP) as examples, noting they "still have a lot of room to run" and will offer investors a 4 to 5% dividend yield that will only grow. He notes that Energy Transfer (ET) offers about an 8% dividend yield and predicts it to grow between 3% and 5%.

He argues that these energy companies "generate steady, consistent earnings," adding, "then they convert those earnings into cash and then turn around and pay that cash back to the shareholder in the form of higher dividends and stock buybacks."

As Hurricane Francine barrels toward Louisiana, Thummel notes that 48% of US refining capacity exists on the Gulf Coast. However, the hurricane shouldn't be too much cause for concern as it appears to be moving further east. He notes that refinery operations in Baton Rouge will likely have to either shut down or reduce production temporarily, but other refineries should be able to operate as normal.

"Keep in mind, this is not the first hurricane, obviously, that these energy companies have gone through. They've done a really good job. Management teams have done a really good job of making their assets more hurricane-resistant. And so that's really benefiting all of us because we don't have to worry about these long disruptions that cause significant price hikes... during the hurricane season itself."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Melanie Riehl

Video Transcript

Rob.

So let's bring it back to investors that are listening right now.

They want to, I want to know where to put money to work, Rob.

And as you always remind us, not all energy stocks are created equal.

So give us some smart places.

Yeah, Josh, and that's, that's really important.

So we really like energy infrastructure to us.

It's, it's actually performed really well this year, but it's still trading at discounts to its historical valuation.

So companies like Williams One Oak Target all in the S and P 500 had great years.

But they, but but they still have a lot of room to run.

They still are trading at discounts their historical enterprise value on metrics and they're gonna grow up.

Uh And, and they offer investors a high, a relatively high dividend yield, 4 to 5 percent dividend yield, that dividend yield is gonna grow.

And we think that that's just attractive.

Um For shareholders, energy transfer is another point, it offers even a higher dividend yield and eight, it probably about an 8% dividend yield, it's gonna grow its dividend 3 to 5%.

So these energy infrastructure stocks are, are really companies that generate steady consistent earnings doesn't, don't rely on the commodity price as much and then they convert those earnings into cash and then turn around and, and, and pay that cash back to the shareholder in the form of higher dividends and stock buybacks.

And, and if you find those types of stocks in an environment where interest rates are coming down and those stocks aren't overvalued or aren't even at historical valuation, which energy infrastructure is not.

We just think that that's a compelling investment opportunity for all investors rob real quick.

I'd be remiss if I didn't ask you about hurricane Francine and its effect on the Gulf production.

And then in turn, what effect we're seeing on oil prices?

How do you think about storms these days with regard to how oil trades?

Yeah, that's a good question, Jillian.

It's always something to keep an eye on.

Uh you know, 48% of us refining capacity is on the Gulf coast.

So you say, oh, that's a lot.

So, so should we be concerned that's coming up the Gulf coast grain as well?

The, the, the, the good news is is that it looks like it's gonna go a little further east.

It looks like it's gonna go a little bit more towards Baton Rouge.

And there is one of the, actually the first oil refinery ever built by standard oil in 1909 is in Baton Rouge.

Now, obviously been upgraded by Exxon.

Uh but, but it, it's on, it's on path to, to probably cause that refinery at least to be shut down temporarily or at least reduce production temporarily.

But in general, other refineries are probably not, not in the path.

And so wouldn't, I wouldn't expect much of a disruption uh to the, to the overall uh e energy sector in general as a result of this particular hurricane.

Keep in mind this is not the first hurricane.

Obviously, that, that, that, that, that these energy companies have gone through.

They've done a really good job.

Management team has done a really good job of, of, of making their assets more hurricane resistant and, and so that's, that's really benefiting all of us because we don't have to worry about these long disruptions that cause significant price hikes uh during periods of uh uh during the hurricane season itself.

Rob always great to see you and have you on the show.

Thanks Shar.

Thanks Julie.