Energy use is evolving, but oil and gas will remain in the mix for some time.
One reason why oil and natural gas stocks have been performing so well this year is that producers have been prioritizing share buybacks and dividends over exploration and new production, helping to keep the commodities they sell at higher prices even as the war in Ukraine has helped boost prices. And it looks like that trend will continue. “There is reason to believe that oil will be higher later in 2023,” says Paul Baessler, chief compliance officer of Q.ai, which provides an artificial intelligence-powered investment app. “The underinvestment by energy companies, generally speaking, will push prices higher in the new year.” Over the longer term, however, the world’s economies are weening themselves from oil and gas, meaning energy investors may want to begin working renewable energy companies into their portfolio. Consider these 10 energy stocks representing both fossil fuels and renewables.
Exxon Mobil Corp. (ticker: XOM)
A risk to oil and gas stocks is the United States tipping into a recession. That would dampen demand for oil and gas, as would continued high inflation eating into personal and company finances. But China may provide a counterpoint to that. “As China reopens, with its significant easing of draconian COVID restrictions, global demand for oil is likely to grow,” Baessler says. “While energy companies are up significantly in 2022, many on Wall Street see further upside.” Baessler says Exxon is well positioned to benefit from a rise in crude prices in 2023. “Exxon Mobil continued to invest over the last two years, adding significant production capacity while others were pausing,” he says.
Diamondback Energy Inc. (FANG)
Along with Exxon, Diamondback is also well positioned to take advantage of further upside for oil in 2023, Baessler says. “Diamondback Energy is a leader in shale basin technology, with its production focused in the Permian Basin of West Texas and New Mexico — one of the most prolific oil-producing locations in the U.S.,” he says. The company’s stock may have more room to the upside than some other energy companies, as its shares have trailed the broader energy sector. Diamondback’s shares are up a not-so-shabby 35.5% year to date as of Dec. 21, but that falls short of the broader sector’s gains.
TotalEnergies SE (TTE)
TotalEnergies is a low-cost oil producer, giving it extra margin. Its size — as a supermajor it’s in the league of Exxon — also means that it’s much better prepared to weather the ups and downs of the cyclical energy market. And, as the world shifts toward renewable energy, so is this European integrated oil and gas producer. The French company is broadening its portfolio of energy generation, including developing large solar and wind farms. But it isn’t giving up on fossil fuels anytime soon. On Dec. 19, the company announced that it and partners had won a new exploration license in a Brazilian petroleum-bearing basin.
Cheniere Energy Inc. (LNG)
Oil and natural gas will represent more than half of the global energy supply mix over the next decade, and the latter will continue gaining in importance, says Rob Thummel, senior portfolio manager with TortoiseEcofin. “Natural gas has become a global commodity, and it will overtake oil as the key source of global energy supply partially due to the positive environmental impact of natural gas replacing coal,” he says. That bodes well for liquefied natural gas exporter Cheniere. The company is “one of the best management teams and capital allocators in the energy sector,” Thummel says. “Cheniere is a classic example of the positive impacts made by the U.S. energy sector in the last decade. Cheniere transformed from a potential LNG importer to become the largest U.S. LNG exporter.”
Targa Resources Corp. (TRGP)
Targa provides midstream natural gas and natural gas liquids services as well as gathering, storing and terminaling crude oil, and storing, terminaling and selling refined petroleum products. “Targa owns and operates critical energy infrastructure in the Permian Basin,” Thummel says. “In a world where energy security matters, the U.S. will become an important supplier of secure energy to the rest of the world, with the Permian Basin being the primary source of growth in the U.S. oil supply.” According to Thummel, analysts estimate the company’s earnings before interest, taxes, depreciation and amortization, or EBITDA, will rise by almost 20% in 2023. Targa’s enterprise value/EBITDA multiple is “too low given TRGP’s growth profile and the essential nature of the assets,” Thummel says.
EQT Corp. (EQT)
The shale oil and gas boom in the U.S. boosted it to the top of world oil and gas production and helped it become the largest exporter of liquefied natural gas. Those exports have been a lifeline to Europe as it tries to ween itself from Russian-produced natural gas. The “U.S. will maintain its role as the largest and lowest-cost producer of natural gas in the world due to companies like EQT,” Thummel says. As the largest producer of natural gas in the U.S., EQT is well positioned to take advantage of higher natural gas prices resulting from the conflict in Ukraine as well as natural gas’s long-term role as a transition fuel to help bridge the gap between coal and renewables.
Orsted A/S (DNNGY)
“The companies we currently like in the energy space are all positively exposed to the growth of alternative energy,” says Amber Fairbanks, portfolio manager at asset management company Mirova. That includes offshore wind utility Orsted. The U.S. is a big growth market for the Danish company, as the nation has lagged Europe and Asia when it comes to offshore wind production facilities, which have the potential to provide significant electricity to coastal cities. Orsted is the world’s largest offshore wind farm developer and was involved in developing two small pilot offshore wind projects in the U.S. It also has a robust pipeline of commercial-scale projects in various stages of development.
Vestas Wind Systems A/S (VWDRY)
This wind turbine manufacturer also stands to benefit from the offshore wind power boom in the U.S., as the Biden administration pushes for 30 gigawatts of offshore wind generation capacity by 2030. But the company also makes wind turbines for onshore wind farms, where the U.S. has been a significant market for years. “The passing of the Inflation Reduction Act in the U.S. further improves the economics of alternative energy relative to traditional sources, and provides a greater degree of visibility into the long-term growth of alternative energy,” Fairbanks says.
NextEra Energy Inc. (NEE)
NextEra Energy is the world’s largest renewable energy company. In addition to solar and wind generation, NextEra is involved in green hydrogen and battery storage. “While traditional energy stocks may still see some near-term price appreciation, more and more companies and governments are committing to greenhouse gas reduction, highlighting a long-term secular trend away from a fossil fuel-based economy,” Fairbanks says. “The companies we like today have strong competitive advantages in the space, solid and visionary management teams, solid financials, and are trading at valuations that continue to underestimate the long-term growth opportunities of alternative energy,” says Fairbanks, who lists NextEra as a top pick.
Iberdrola SA (IBDRY)
This Spanish multinational electric utility company has a global footprint that includes a renewables presence in Europe, which will need more green energy to lessen its dependence on Russian energy and to meet its carbon emissions reduction targets. “Although traditional oil and gas companies have seen strong stock price appreciation year to date, geopolitical tension has highlighted the need for more energy independence, particularly in Europe,” Fairbanks says. Like NextEra, Iberdrola has a high percentage of electricity generation from alternatives, says Fairbanks. The company is working on a $49.8 billion (47 billion euros) plan to increase its installed renewables capacity by 12,100 megawatts, to 52,000 megawatts by 2025. By 2030, it expects to have 80,000 megawatts installed.
10 best energy stocks to buy in 2023:
— Exxon Mobil Corp. (XOM)
— Diamondback Energy Inc. (FANG)
— TotalEnergies SE (TTE)
— Cheniere Energy Inc. (LNG)
— Targa Resources Corp. (TRGP)
— EQT Corp. (EQT)
— Orsted A/S (DNNGY)
— Vestas Wind Systems A/S (VWDRY)
— NextEra Energy Inc. (NEE)
— Iberdrola SA (IBDRY)
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Update 12/22/22: This story was previously published at an earlier date and has been updated with new information.