The energy transition away from fossil fuels is happening, but its pace will depend on government policy — and energy has become a hot-button political issue.
Whether it’s fighting about environmental, social and governance, or ESG, criteria in state and local investment decisions or tension about oil and gas extraction on federal land, the U.S. seems to be as divided on energy policy as it is on many other issues.
The November contest between President Joe Biden, who has pushed through major renewable energy legislation, and former President Donald Trump, who would likely roll back green policies, will determine the trajectory of America’s energy industry and its global influence for the next four years.
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With the election just a few months away, investors looking at energy stocks may want to move with caution.
“The upcoming election into end of year and forthcoming policy changes based upon who wins should have a noticeable shift in tailwinds in this space, so I want to tread lightly until we get a better picture,” says Daniel Bustamante, chief investment officer at asset manager Bustamante Capital.
“I think much of the market trades sideways to slightly higher into the rest of the year, at least until we get a clear picture on the upcoming election,” he adds. “Legislative and policy risk swings both ways, and that is going to have an effect on renewable energy and energy markets at large despite any other macro tailwinds that are present.”
Although he’s not as bullish on energy stocks as he was in the last quarter of 2023 and the first quarter of this year, he still thinks there are some with reasonable upside.
With that in mind, here are some expert picks for energy stocks this year:
— Quanta Services Inc. (ticker: PWR)
— Darling Ingredients Inc. (DAR)
— Valero Energy Corp. (VLO)
— Schlumberger Ltd. (SLB)
— Bloom Energy Corp. (BE)
— Gevo Inc. (GEVO)
— NextEra Energy Inc. (NEE)
— Cheniere Energy Inc. (LNG)
Quanta Services Inc. (PWR)
The long-term trends of electrification and decarbonization guide stock picking for Tony Tursich, co-portfolio manager at Calamos Investments.
“We want exposure to long-term secular growth trends and companies with flexible business plans,” he says.
One of his picks is Quanta Services, which designs, installs, repairs and maintains energy and communications infrastructure. It works with the utility, renewable energy, communications, pipeline and energy companies.
The company is set to benefit from the upgrading and expansion of the electric grid that will accelerate as more of the economy becomes electrified, according to Tursich.
Quanta’s expertise with natural gas pipelines also means it has flexibility as renewable natural gas takes more market share, he says.
“This company is still well positioned to grow and thrive,” he says.
Darling Ingredients Inc. (DAR)
Tursich also likes this company, which turns edible by-products and food waste into sustainable products and renewable energy.
With more than 260 facilities in over 15 countries, the company says it repurposes about 15% of the world’s meat industry waste streams into green energy, renewable diesel, collagen, fertilizer, animal proteins and meals, and pet food ingredients.
Darling is involved in a joint venture with Valero Energy Corp. (VLO) called Diamond Green Diesel, which produces fuel from used cooking oil, inedible animal fats and corn oil.
Valero Energy Corp. (VLO)
Speaking of Valero, it’s one of Bustamante’s top picks. It’s a refining company that turns crude oil into products like gasoline, propane and asphalt.
With lower debt and positive free cash flow at the end of the first quarter, the company could end up buying back more of its stock, Bustamante says.
“They’ve been increasing dividends and buybacks the last two years, and that trend should continue,” he says.
During the first quarter, the company returned $1.4 billion to shareholders through dividends and stock buybacks.
The stock has slipped since April, but that may be a buying opportunity. Bustamante has a price target of $175 on the stock, which closed at $155.77 on June 6.
Schlumberger Ltd. (SLB)
Schlumberger is one of the world’s largest international oilfield services companies. The stock may be attractively priced, as it has fallen 16% year to date through June 6.
Recently announced acquisitions have put some selling pressure on the stock, Bustamante says.
This year, Schlumberger announced plans to buy Aker Carbon Capture ASA (OTC: AKCCF) and ChampionX Corp. (CHX), a company involved in chemistry solutions, artificial lift systems, and highly engineered equipment and technologies for oil and gas drilling and production.
It’s not uncommon for the shares of acquiring companies to fall after deal announcements because they often have to pay a premium for the target company.
“I believe these strategic acquisitions will only add to the core of the business,” Bustamante says. “Earnings are here in July, and more than likely we’ll be looking to buy on weakness, should it come.”
[READ: 6 Best Green Hydrogen Stocks and ETFs to Watch]
Bloom Energy Corp. (BE)
Carbon capture is just one of the many strategies for decreasing the amount of planet-warming carbon dioxide in the atmosphere.
Another is green hydrogen. Most hydrogen these days is produced using fossil fuels without carbon capture. But some companies are developing green hydrogen supply chains, in which the hydrogen is created using renewable energy.
Once hydrogen is separated from water using an electrolyzer powered by renewable energy, it can then be stored and used as fuel to power hard-to-abate sectors, such as shipping and steelmaking. In the case of steelmaking, hydrogen can also replace coal as the reductant for iron ore in blast furnaces. Hydrogen can also be used in fuel cells to power electric vehicles.
Bloom Energy is one of the blue chips of the green hydrogen sector. It makes fuel cell systems that can run on different inputs, including hydrogen. Its technology can be adopted by the utilities and transportation industries.
Gevo Inc. (GEVO)
Another way to reduce carbon emissions is through sustainable aviation fuel, which is produced with non-petroleum inputs like food and yard waste, used cooking oil, soybean oil and ethanol from corn.
Gevo uses biomass to create aviation fuel. That biomass includes starch byproduct from high-protein animal feed that the company also produces.
The company also makes renewable natural gas. Natural gas — whether it’s extracted from the ground or, like Gevo’s, made from dairy farm manure and high-protein animal feed from non-edible corn — is expected to be a transition fuel for some time as nations around the world seek to use less coal for electricity production.
NextEra Energy Inc. (NEE)
Investors looking for a large, stable play on the energy transition should consider this company, as NextEra regularly shows up in experts’ top picks for renewable energy stocks.
Its regulated utility segment generates, transmits, distributes and sells electric energy in Florida. The company also produces electricity from renewable sources, including wind and solar, in another business unit.
That latter business segment in the first quarter added approximately 1,545 megawatts of solar, 145 MW of wind, 1,025 MW of storage and 50 MW of wind repowering to its backlog, making for its second-best-ever quarter for new renewables and storage origination and its best quarter ever for both solar and storage origination.
Cheniere Energy Inc. (LNG)
Fracking has made the U.S. the world’s biggest natural gas producer. That has helped keep the price of domestic natural gas low and enabled many utilities to use the commodity instead of more expensive coal.
With natural gas cheaper in the U.S. than it is in Europe and Asia, U.S. producers have been champing at the bit to sell their product abroad, and America is now the biggest exporter of liquefied natural gas, or LNG.
Natural gas is easier to transport when it is in liquid form. But it takes massive infrastructure to do that, then load it onto specialized ships, and turn it back into gas at its destination port for further transportation by pipeline.
With facilities in Louisiana and Texas, Cheniere Energy has one of the world’s biggest natural gas liquefaction platforms, and it says it is pursuing liquefaction expansion opportunities.
A risk to expansion is the Biden administration’s current pause on pending decisions on LNG exports to non-free-trade-agreement countries. But if the pause is lifted, Cheniere is in a good position to take advantage of new expansion possibilities.
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8 Best Energy Stocks to Buy in 2024 originally appeared on usnews.com
Update 06/07/24: This story was previously published at an earlier date and has been updated with new information.
