Why investors should hold energy plays amid Mideast tensions

Amid escalating geopolitical tensions in the Middle East — notably between Israel and Iran — oil prices (CL=F, BZ=F) have been experiencing fluctuations with an overall upward trend. To explore the implications for the broader energy sector, Truist Securities Managing Director of Energy Neal Dingmann shares his insights on Market Domination.

Dingmann observes a "bit more risk-off" sentiment within the energy sector, noting an increasing bearish attitude among investors towards oil. However, he cautions that if Middle Eastern tensions were to intensify, the impact on oil prices could be "very quick and quite severe," potentially triggering an immediate 10 to 15% surge in prices.

Despite this uncertainty, Dingmann advises investors to maintain their positions in energy stocks. "To me, the reason to hold the group is it's hard to find a sector where you see better shareholder return in the form of bulk dividends and buybacks than you do in the energy stocks these days," adding that he is "cautiously optimistic" on the sector.

To watch more expert insights and analysis on the latest market action, check out more Market Domination here.

This post was written by Angel Smith

Video transcript

We've been following the energy sector as crude prices have jumped recently in mid rising tensions in the mid east Exxonmobil shares trading near an all time high show.

How should investors be thinking about energy stocks for more?

We're bringing in Neil Dingman, managing director at Truest Securities and, and Neil, of course, today oil is down um because we're getting what people are seeing as disappointing news or lack of news, I guess out of China.

Um So first I guess talk to us about oil prices versus the oil stocks themselves and you know, what kind of um correlation that we're seeing?

Sure, thanks for having me.

Um You know, I think what we're seeing and you, you, you mentioned even Exxon, not, not only I think in energy but in the overall sector, we're seeing a bit more risk off these days.

Um I'm, I'm just surprised I've been out a lot, talked to many investors and I just find it quite surprising how consensus uh I would even call it bearish investors in the energy investors are on oil yet they still remain quite, quite bullish on gas.

So to me, when you have days like today, the risk off, as you mentioned, I think not only from China but just less uh geopolitical tension going on out there or perceived less geopolitical tension.

It's not surprised to see some of the more uh you know, vol names getting hit harder and then you know, the Exxons and some of the other uh higher quality names holding in better.

I am, you know, Neil, there was an NBC report that dropped um showing that reporting that Israeli officials still considering a range of options and that could include hitting Iranian oil facilities if that happened, Neil.

And you talk, I'm sure your clients are asking about it.

What what would be the economic impact, the sentiment impact, I mean, the the impact I think would be very quick and, and and quite severe, I think you're, you're talking about uh immediate 10% potentially even 15%.

You, you think about, you know, not only what Saudi accounts and, and and the Middle East accounts for existing, but the amount of voluntary production that they continue to have offline uh which could, you know, add to that.

So again, if both all that supply starts to come off very, very quickly, I think what investors realize is the US is not going to be able to make that up in a short amount of period.

And thus, as such, I think you have prices go up very quickly.

And is that, is that potential upside risk a reason to hold the oil majors right now Neil.

I think that, but I think more so um I just think the amount of supply is going to be limited out there even if demand is not as high as maybe hoped.

I still think it's going to be stable.

So to me, the reason to hold the group is it's hard to find a sector where you see better shareholder return in the form of both dividends and buybacks than you do most of the energy stocks these days.

So again, I probably find myself maybe a little more cautiously optimistic, finding more higher quality names.

Uh But yet a lot of these names are names that can, you know, if you, if you add both the share, you know, both dividends and the stock buybacks, you're talking about upwards to 10% is what they're paying out.

And so Neil as you, as you screen for those higher quality names, uh Diamondback Energy is that, is that another name that would fit the bill?

Uh Absolutely.

That's my favorite.

I mean, and what's the key behind their success?

They're the lowest operator you mentioned Exxon, I mean, Diamondbacks even they're pure Permian based out of Midland, Texas.

Uh their break even is in the mid thirties.

So again, yes, they would love for prices to be higher like every other energy company.

But even if prices come down and, and once again to the mid sixties diamondback is making a ton generating a ton of free cash flow.

Uh And I think you'll see them continue to pay a very strong dividend and continue to buy back material amount of shares.

Now, one of the interesting things I I picked up in one of your notes recently is you talk about that balance between that payout and having low leverage on the balance sheet, low debt paying and maybe using some of that free cash flow to pay down that debt instead of shareholder returns.

How are you thinking about what is more attractive in this environment?

It's, it's, it's a great point, Julie because what's been interesting is three or four years ago, investors in my space energy investors were comfortable with at least two times if not three times leverage.

And now and now a number of investors get nervous with even one times leverage.

So again, I I think for most of my companies, I would prefer that they're at least under one times, but once they get under one times leverage, I would hope that they would lean more to Sheryl the return.

But again, there's a number of smaller companies that currently today have around 1.5 or maybe a little bit more times leverage.

I'd prefer that those companies focus primarily on debt repayment until they get closer to sub one Neil.

Always great having you on the show.

Thanks for joining us.

Thank you all