The recently concluded U.N. climate summit resulted in an agreement calling for the “transitioning away from fossil fuels in energy systems,” but it stopped short of calling for their phasing out. The closest it got was calling for “accelerating efforts toward the phase-down of unabated coal power.”
By the standards of these meetings, it was a step toward reducing carbon emissions in the global economy to net zero. But the fact that the end of the conference was delayed by what the U.N. called “intense overnight negotiations” on whether to call for a phase-out or phase-down of fossil fuels illustrates the continued global reluctance to completely ween the planet from oil and gas use in the short term.
[Sign up for stock news with our Invested newsletter.]
In fact, global demand for oil and natural gas will continue to increase at least until 2030, according to separate estimates from the International Energy Agency and the Economist Intelligence Unit.
While renewable energy sources like wind and solar are gaining ground, oil and gas companies may continue to be profitable for some time. Some investors want to avoid providing money to fossil fuel companies on principle, but others want to take advantage of shorter-term gains in these stocks.
It’s worth keeping in mind that the energy sector is volatile, with stocks in the sector shining when economic demand is hot or supply shocks happen, such as the attacks by Iran-backed Houthi militants that have disrupted Red Sea oil shipping routes. But these companies are also subject to downturns, and the S&P 500’s energy sector has only returned about 1% over the past decade, which means investors need to pay attention to industry dynamics just as much as company fundamentals when considering putting money into energy stocks. That goes for both fossil fuel and renewable energy companies.
Energy stock portfolios are likely to change over time, with fossil fuel weightings slowly giving way to renewable companies. Here’s a look at a group of energy companies involved in old-school oil and gas, to be compared with our recent list of renewable energy stocks:
| Stock | Forward dividend yield |
| Exxon Mobil Corp. (ticker: XOM) | 3.7% |
| Occidental Petroleum Corp. (OXY) | 1.2% |
| Chevron Corp. (CVX) | 4% |
| Vitesse Energy Inc. (VTS) | 9.2% |
| Valero Energy Corp. (VLO) | 3.1% |
| EOG Resources Inc. (EOG) | 3% |
| Cheniere Energy Inc. (LNG) | 1% |
Exxon Mobil Corp. (XOM)
Even as the market is shifting toward renewables, albeit slowly, big fossil fuel companies are also getting into cleaner technologies, such as hydrogen and carbon capture.
While Exxon is still very much an oil and gas company, it has the deep pockets needed to spend big on initiatives like these, which could serve it well if public pressure and market dynamics lead to reduced oil and gas use.
“Carbon capture and sequestration (CCS) has generated a significant amount of interest from investors trying to understand the commercial terms of the opportunity set,” Water Tower Research said in a research note.
Exxon is among the energy companies “advancing CCS projects in major industrial corridors along the U.S. Gulf Coast,” according to the research group. “Most of the projects will likely include partnerships to provide emitters with a full-service solution to transport and permanently store captured CO2,” it adds. “As the commercial terms of these projects crystalize, investors could begin to assign tangible value.”
Occidental Petroleum Corp. (OXY)
Water Tower Research points to Occidental as another player in the carbon capture space. The company is building a direct air capture facility in Texas that “is expected to be the largest DAC facility in the world, with the capacity to capture 500,000 tons of atmospheric CO2 per year when commercial operations begin in mid-2025,” the research firm says.
Another reason to like Occidental is the support of Warren Buffett’sBerkshire Hathaway Inc. (BRK.A, BRK.B).
“Buffett just keeps buying more,” says Robert Johnson, a finance professor at Creighton University. “Buffett’s conviction on OXY is evidenced by the fact that OXY is Berkshire’s sixth-largest holding.”
Chevron Corp. (CVX)
Johnson says Chevron is “another good choice,” pointing out that the company is the fifth-largest holding in Berkshire Hathaway’s stock portfolio and has a “handsome dividend yield.” Its yield is 4% as of Jan. 2.
Chevron is a vertically integrated major oil and gas company, meaning it produces oil and gas in an upstream unit, transports petroleum products in a midstream segment, and refines petroleum into usable products and sells them in its downstream unit.
The company is also investing in renewable energy, and like Exxon, it has the deep pockets to scale up in clean energy if it wants to.
Water Tower Research also includes Chevron on its list of companies moving into carbon capture, along with Exxon, Occidental and Talos Energy Inc. (TALO).
Vitesse Energy Inc. (VTS)
Water Tower Research recently initiated coverage of this oil and gas company with interests in North Dakota. The company’s business model is to buy non-operated working and mineral interests in assets that are in production or almost ready for drilling.
Limited capital expenditures support free cash flow and allow the company to have low debt and pay a generous dividend. The stock was yielding 9.2% recently.
“Low leverage is a key element of Vitesse’s business strategy,” Water Tower said in a separate note. “Our estimates suggest Vitesse could generate substantial free cash flow through YE24 to support management’s capital return ambitions.”
Water Tower also notes that members of Vitesse’s senior management own more than 20% of the company’s common stock, which aligns their interests with shareholders.
Valero Energy Corp. (VLO)
Daniel Bustamante, chief investment officer of asset manager Bustamante Capital, likes this downstream energy company. Valero manufactures and markets transportation fuels and other energy products. Its refining operations turn crude oil into petroleum products such as gasoline, propane and asphalt.
The company recently authorized a $2.5 billion share buyback program that doesn’t have an expiration date. That’s on top of the $2.2 billion the company returned to shareholders in the third quarter. The company paid $360 million of that in dividends and $1.8 billion in a purchase of about 13 million shares of common stock.
“While we were heavily invested in that name last summer, we took profits but are watching the macro picture in energy as we head into Q1 2024,” Bustamante says.
EOG Resources Inc. (EOG)
This crude oil and natural gas exploration and production company has also been actively buying back stock, a tactic that many energy companies have been using to return money to shareholders who don’t want companies to go overboard with capital expenditures to increase production.
In addition to repurchasing $61 million worth of shares during the third quarter, the company also increased its regular quarterly dividend by 10% and declared a special dividend of $1.50 per share. The stock was yielding 3% as of Jan. 2.
“EOG Resources is a favorite,” Bustamante says. “The CEO, Ezra Yacob, is as capable as any CEO in the space, and the active dividend increases and share buybacks are a testament to them putting shareholders first.”
Cheniere Energy Inc. (LNG)
The U.S. is the biggest natural gas-producing country in the world and has increased in importance as an exporter of liquefied natural gas, especially as Europe tries to free itself from Russian energy dependence amid the war in Ukraine.
Cheniere Energy has one of the largest natural gas liquefaction platforms in the world, with facilities in Louisiana and Texas, and it says it is also pursuing liquefaction expansion opportunities.
“In less than a decade, the U.S. pivoted from being an importer of natural gas to becoming the largest exporter of LNG in the world,” says Rob Thummel, portfolio manager with Tortoise Capital Advisors. “Cheniere is the largest U.S. exporter of natural gas and will retain this status over the next several years as demand for U.S. natural gas grows from multiple countries around the world.”
More from U.S. News
7 Best Natural Gas Stocks and Funds to Buy
8 Dividend Stocks With Growing Payouts
9 Dividend Aristocrat Stocks to Buy Now
7 Best Oil and Gas Stocks to Buy in 2024 originally appeared on usnews.com
Update 01/03/24: This story was published at an earlier date and has been updated with new information.
