Energy stocks are rebounding.
Oil companies faced lower demand for a portion of 2020, weighing their stocks down to 52-week lows. Shares have rebounded as crude oil prices rise in 2021, with more demand and extremely cold temperatures across the U.S. Brent crude oil prices recently hit more than $65 a barrel — the first time in more than 12 months. As energy stocks have bounced back, some are good additions to a portfolio since they have higher amounts of free cash flow and lower debt levels. Crude oil prices could be less volatile in 2021 since the outlook for the energy market is positive as the economy recovers, says Michael Underhill, chief investment officer of Capital Innovations in Pewaukee, Wisconsin. The U.S. Energy Information Administration projects that the share of renewables in the electricity generation mix will increase from 21% in 2020 to 42% in 2050. Wind and solar generation are responsible for most of that growth, and it will come from companies like Exxon Mobile Corp. (ticker: XOM) and Royal Dutch Shell (RDS.A). Here are seven of the best energy stocks to buy.
Chevron Corp. (CVX)
Chevron has maintained a generous dividend yield of 5.43%. The oil behemoth acquired Noble Energy, another oil producer, in a $5 billion all-stock deal last July. Chevron exhibits many qualities of the classic value stock, says Robert Johnson, a finance professor at Creighton University’s Heider College of Business in Omaha, Nebraska. It sells at a price-to-sales ratio of 1.84, considerably lower than the price-to-sales ratio of the S&P 500 of 2.88, and also sells at a price-to-book ratio of 1.36, roughly a third of the market price-to-book ratio of 4.27, he says. “Chevron gets the Warren Buffett seal of approval,” Johnson adds. “Berkshire Hathaway’s stake in CVX was increased in the past quarter. In fact, it is the tenth-largest holding of Berkshire Hathaway (BRK.A, BRK.B) at 1.52% of the portfolio.”
Suncor Energy (SU)
Another pick of billionaire Warren Buffett is Suncor Energy, one of Canada’s largest integrated energy companies, operating in Canada, the U.S. and the North Sea. While it is one of Berkshire Hathaway’s smallest holdings, at 1.3%, it is in the Oracle of Omaha’s portfolio, Johnson says. The company also has some characteristics of a value play with a dividend yield of 3.48%, a price-to-sales ratio of 1.48 and a price-to-book ratio of 1.02. Suncor reported fourth-quarter funds from operations of $1.22 billion with an operating loss of $142 million. The company lowered its annual operating costs by $1.3 billion, or 12% in 2020, compared to 2019 levels and plans to pay down $1 billion to $1.5 billion of debt and repurchase between $500 million and $1 billion of the company’s shares in 2021.
Magellan Midstream Partners (MMP)
Magellan Midstream Partners, a refined products and pipeline operator, reported fourth-quarter net income of $183.9 million, compared with $286.4 million for the fourth quarter of 2019. The decrease was due to lower demand for refined products amid the pandemic, lower commodity prices and lower volumes and average rates on its crude oil pipelines. Magellan had $5 billion of debt outstanding and $13 million of cash on hand as of Dec. 31, 2020. The company’s stock remains a good buy and is a “safe” addition in the midstream sector, says Charles Sizemore, chief investment officer of Sizemore Capital Management in Dallas. Magellan also offers a nearly 10% dividend yield, and it comes with a good balance sheet and low leverage.
Enterprise Products Partners (EPD)
Enterprise Products Partners, a diversified energy infrastructure operator, reported net income of $3.8 billion for 2020, compared with $4.6 billion for 2019. Net income for 2020 and 2019 were lowered by asset impairment and related charges of $891 million. The company’s free cash flow increased by 8% to $2.7 billion for 2020. EPD provides a dividend yield of 8.35%. “In a market that is starting to look bubbly, pipeline operators are one of the last sectors that look unambiguously cheap,” Sizemore says. “The new Biden administration is less ‘energy friendly’ than the Trump administration was, but that’s not necessarily bad for the best-in-class operators like EPD. A tougher operating environment may be the death knell for some of the weaker operators that have been hanging on by a thread for the past several years, but that creates opportunities for the stronger players to increase market share and potentially buy high-quality assets on the cheap.”
BP’s capital spending projects from 2014 to 2015 are now coming online. The energy giant has one of the best production outlooks of international oil companies, Underhill says. BP’s above-average exposure to transportation fuels provides good leverage to reopening economies and is “entering a positive earning revision cycle in 2021,” he says. The company’s estimates are for a 19% free cash flow yield in 2022, with the rising prospect of buybacks. BP is also focusing on capital discipline and costs, moving to focus on decarbonization strategy, and it was one of the larger bidders in the most recent U.K. offshore wind auction.
Cheniere Energy (LNG)
Cheniere Energy is a pure-play operator of facilities that liquefy U.S.-produced natural gas that can be loaded onto ships and transported globally. Many countries rely on importing liquefied natural gas from the U.S. and elsewhere to reduce emissions, says Rob Thummel, a portfolio manager at Tortoise Capital Advisors in Kansas. Cheniere is expected to grow its revenue due to the rise in global demand for natural gas, he says. The company’s free cash flow is “ramping up quickly” as new terminals come online and Cheniere Energy has the first-mover advantage, Underhill says. The company is reducing its capital expenditure budget, deleveraging its balance sheet and estimates free cash flow yields of 12% to 15% in 2021 to 2022, he says.
EOG Resources (EOG)
EOG Resources, a Houston-based oil and gas company, has a strong balance sheet and a dividend yield of 2.48%. The company still has a “plethora of well locations” despite shutting in crude oil production, Stewart Glickman, senior equity analyst at CFRA Research in New York, wrote in a report. “EOG has high relative financial discipline within the sector and a focus on the internal rate of return of new production that is slow and steady,” Underhill says. The company’s free cash flow is improving and its stock is selling at a bigger discount to net asset value versus peers, given that EOG has some exposure to drilling on federal lands, he adds.
The best energy stocks to buy for 2021:
— Chevron Corp. (CVX)
— Suncor Energy (SU)
— Magellan Midstream Partners (MMP)
— Enterprise Products Partners (EPD)
— BP (BP)
— Cheniere Energy (LNG)
— EOG Resources (EOG)
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Update 02/22/21: This article was published previously and has been updated with new information.