With oil prices near multiyear highs and the fight against climate change intensifying, there are ways to find value in energy stocks.
After oil prices rose to multiyear highs in the mid-$70s per barrel earlier this summer, they have hung in the high $60s in August so far as the resurgent coronavirus spurs international travel restrictions while the number of people receiving vaccinations steadily rises. Oil prices are likely to remain stable while the global economy recovers amid the global pandemic, says Rob Thummel, senior portfolio manager at TortoiseEcofin in Overland Park, Kansas. “I don’t expect oil prices to spike too much higher as OPEC has significant volumes that can be returned to the market if the global recovery accelerates even more,” he says. Taking into account the lack of clear direction for oil and the intensifying push to combat climate change, here are seven valuable energy stocks to add to a portfolio.
Cheniere Energy Inc. (ticker: LNG)
Cheniere Energy operates facilities that liquefy natural gas to be loaded onto ships and transported globally. As the largest liquefied natural gas, or LNG, operator in the U.S., Cheniere Energy remains a favorite, Thummel says. “The U.S. has a real opportunity to be a global leader in liquefied natural gas,” he says. “The U.S. could be the largest LNG provider in the world by the middle of the decade.” The stock market is undervaluing the steady, fee-based nature of the company. “This model was tested during the pandemic, and the company delivered a steady, growing stream of cash flow,” Thummel says. “As the company increases free cash flow generated to pay down debt and establish a dividend, the market will begin to better appreciate the potential of Cheniere.”
Western Midstream Partners LP (WES)
Western Midstream Partners is a master limited partnership, or MLP, with assets in New Mexico, the Rocky Mountains, Pennsylvania and Texas. The partnership provides investors with a 6.9% dividend yield. Investors are drawn to MLPs with a high free-cash-flow yield, which can result in lowering debt levels, increasing dividends and buying back stock. Energy companies tightened their capital spending budgets, and many have double-digit free cash flow yields, compared to the 5% free cash flow yield of S&P 500 companies, Thummel says. These free cash flow yields are estimated to increase in 2022, he adds.
NRG Energy Inc. (NRG)
NRG Energy, the Houston-based electricity company, reported second-quarter net income of $1.1 billion, compared to a loss of $82 million during the first quarter, which included massive losses from the blackout in Texas caused by a February storm. The company offers a dividend yield of 3%, and its cash flow is expected to continue to improve since the setback in February, says Michael Underhill, chief investment officer of Capital Innovations in Pewaukee, Wisconsin. Over a longer period, the company’s stock could trade closer to the consumer staples or telecom sectors than to traditional independent power producers, he says. The price target of the stock is $57, “which implies (significant) upside from the current price and is one of our largest holdings for our institutional client accounts,” Underhill says. NRG finished the trading day Aug. 9 at $43.89.
MPLX LP (MPLX)
MPLX LP, a midstream energy logistics firm that transports and stores gas and refined petroleum products, is a large-cap MLP formed by Marathon Petroleum Corp. (MPC) The dividend yield is 10.1% as of Aug. 10. The company reported second-quarter net income of $706 million, compared to net income of $648 million for the second quarter of 2020. Its management team is well run and has bought back units from the partnership’s excess cash flow since 2020, Thummel says.
Chevron Corp. (CVX)
Chevron is intent on remaining a traditional oil company and provides a generous dividend yield of 5.3%. Chevron plans to allocate $3 billion to technology during the next seven years to eliminate harmful emissions from its operations. In October 2020, the oil behemoth acquired Noble Energy, another oil producer, in a $13 billion deal including debt. Chevron is a classic value stock that an investor could add to a portfolio, says Robert Johnson, a finance professor at Creighton University’s Heider College of Business. Berkshire Hathaway’s (BRK.A, BRK.B) stake in CVX fell to 23.6 million shares in 2021.
BP plc (BP)
BP, an energy behemoth that owns a large portfolio of renewable assets, provides a 5.2% dividend yield. The company agreed to acquire 9 gigawatts of U.S. solar development projects from developer 7X Energy in June. This acquisition would increase the company’s renewables pipeline from 14 GW to 23 GW. BP also owns offshore wind interests in the U.S. and U.K. and plans to develop 50 GW of renewable generating capacity by 2030. BP generates one of the best production outlooks of international oil companies, and the stock could generate returns of 7.2% in 2021 and 10.1% in 2022 with crude oil prices at $70 per barrel, Underhill says.
Suncor Energy Inc. (SU)
Suncor Energy, a large integrated energy company, operates in Canada, the U.S. and the North Sea. Suncor provides a 3.5% dividend yield and reported generating CA$2.4 billion in funds from its operations during the second quarter. Cash flow increased to CA$2.08 billion for the second quarter of 2021 from CA$768 million in the prior-year quarter. Suncor repurchased 23 million common shares for CA$643 million under the company’s share repurchase program and made dividend payments totaling CA$315 million. “The improved cash generation enabled us to increase shareholder returns to approximately $1 billion, representing approximately 40% of our funds from operations, and we’re targeting further debt reduction in the latter half of the year in line with our previously announced capital allocation strategy,” says CEO Mark Little.
Seven energy stocks to buy now:
— Cheniere Energy Inc. (LNG)
— Western Midstream Partners LP (WES)
— NRG Energy Inc. (NRG)
— MPLX LP (MPLX)
— Chevron Corp. (CVX)
— BP plc (BP)
— Suncor Energy Inc. (SU)
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Update 08/10/21: This story was published at an earlier date and has been updated with new information.