When economies get rolling, energy stocks typically benefit. The energy sector is broad-based, with a range of companies supplying energy for the economy to function. On the commodity front, oil also gets increased investor attention.
According to BP (NYSE:BP), in the past quarters, “China was by far the biggest individual driver of primary energy growth, accounting for more than three quarters of net global growth. India and Indonesia were the next largest contributors, while the US and Germany posted the largest declines in energy terms.”
When it comes to energy stocks, most people think of oil companies, whose fortunes are typically tied to the price of crude oil and thus supply and demand dynamics. Analysts usually discuss prices of the global benchmark Brent crude and the U.S. benchmark, West Texas Intermediate (WTI). Brent is currently over $64 and WTI is about $61.50.
The early part of 2020 was one of the worst years in history of many energy stocks, especially for oil and gas firms. Share of oil majors like Chevron (NYSE:CVX), ExxonMobil (NYSE:XOM) and BP declined considerably. A large number of firms also cut their dividends in an effort to improve their balance sheets and cash positions.
But since the lows seen in the spring of 2020, the outlook for the industry has improved dramatically. Over the past 12 months, the Dow Jones Oil & Gas index has returned about 8%. That momentum could continue, especially if global economies continue growing as expected through the coming years.
With that information, here are seven energy stocks to research further:
- Baker Hughes (NYSE:BKR)
- Cheniere Energy (NYSE:LNG)
- NextEra Energy (NYSE:NEE)
- Pacer American Energy Independence (NYSEARCA:USAI)
- Renewable Energy Group (NASDAQ:REGI)
- VanEck Vectors Oil Refiners ETF (NYSEARCA:CRAK)
- Vanguard Energy ETF (NYSEARCA:VDE)
Despite the dominance of oil and gas companies in the energy sector, recent years have seen big growth in the alternative energy space. As sources of energy continue to evolve, investors are scrambling to choose clean energy stocks that will generate robust returns from the future trends in the industry. Finally, public utilities can also be included within the energy sector.
Energy Stocks to Buy: Baker Hughes (BKR)
52-Week range: $12.01 – $25.64
Dividend yield: 3.58%
Houston, Texas-based Baker Hughes is an oilfield services company. Such businesses are “engaged in the manufacturing, repair and maintenance of equipment used in oil extraction and transportation.”
Baker Hughes reported fourth quarter and 2020 fiscal year results on Jan. 21. Revenue was $5.5 billion, down 13% year-over-year (YoY), while adjusted net loss was $50 million, compared to adjusted net earnings $179 million in the prior year period. Adjusted diluted loss per share was 7 cents, compared to adjusted diluted earnings per share of 27 cents a year ago. Free cash flow for the quarter was $250 million, down 76% YoY from $1.1 billion.
CEO Lorenzo Simonelli said:
“Despite an incredibly challenging year for the industry in 2020, we generated over $500 million in free cash flow, booked $6.4 billion in TPS orders and executed on our substantial cost-out and restructuring program. We also took several important steps to accelerate our strategy and invest in energy transition technologies, helping to position the company for the future.”
Over the past year, BKR stock is up about 49%. Forward P/E and P/S ratios are 25.51 and 0.65, respectively.
Cheniere Energy (LNG)
52-Week range: $37.10 – $77.11
Dividend yield: N/A
Cheniere Energy is the largest producer of liquefied natural gas (LNG) in the world. It owns and operates the Sabine Pass liquefied natural gas terminal via its stake in Cheniere Partners (NYSEAMERICAN:CQP). According to the U.S. Energy Information Administration (EIA), “Natural gas has many qualities that make it an efficient, relatively clean burning and economical energy source.”
Cheniere Energy reported fourth quarter and full year results on Feb. 24. Revenue was $2.8 billion, a 7% YoY decline. GAAP net loss stood at $194 million, compared to net income of $939 million in the prior year period. Net loss per share was 77 cents.
“I am extremely proud to report fourth quarter and full year 2020 financial results that place us solidly within our original, unchanged Consolidated Adjusted EBITDA guidance range and above our Distributable Cash Flow guidance range for the year,” remarked Jack Fusco, Cheniere’s Chief Executive Officer. “The results we reported today once again prove the resilience, stability and reliability of our business through commodity cycles.”
Over the past 52 weeks, the shares have returned over 75%. LNG stock’s forward P/E and P/S ratios are 17.24 and 1.97, respectively. In the short-run, some profit-taking is possible. A potential decline toward the $65 level or below would improve the margin of safety.
In the long-run however, this company is likely to do well. As natural gas is not a highly carbon-intensive fossil fuel, companies like Cheniere get attention from investors interested in clean energy sources too. Plus the market for natural gas has been resilient during the pandemic. Given its wide moat in the sector, the group can continue creating shareholder value for many quarters to come.
NextEra Energy (NEE)
52-Week range: $55.65 – $87.69
Dividend yield: 1.95%
Juno Beach, Florida-based NextEra Energy is one of the largest U.S. utility companies by market capitalization. That market cap currently stands at $155 billion. The group operates electric power companies in North America.
In addition, through subsidiary NextEra Energy Resources, it generates renewable energy from the wind and sun. Its energy generation capacity includes natural gas, nuclear, wind and solar assets. It is in fact one of the largest wind and solar operators.
NextEra Energy reported fourth quarter and full year results in late January. Revenue was $4.40 billion, compared to $4.59 billion in the prior year quarter. On an adjusted basis, NextEra Energy’s fourth-quarter earnings were $785 million, or cents per share. A year ago, the same metrics had been $706 million, or 36 cents per share.
“NextEra Energy’s performance in 2020 was strong both financially and operationally,” said Jim Robo, chief executive officer of NextEra Energy. “We achieved approximately 10.5% growth in adjusted earnings per share YoY and delivered a total shareholder return of approximately 30%, significantly outperforming both the S&P 500 and the S&P 500 Utilities Index.”
Since April 2020, the stock has returned about 28%. NEE stock’s forward P/E and P/S ratios stand at 31.35 and 8.65 respectively, pointing to an overstretched valuation level. Investors could possibly wait for a pullback toward the $65 level before initiating a position in the stock.
Pacer American Energy Independence ETF (USAI)
52-Week range: $12.11 – 21.44
Dividend yield: 6.42%
Expense ratio: 0.75% per year
Our next choice is an exchange-traded fund. The Pacer American Energy Independence ETF gives access to U.S. and Canadian businesses focusing on midstream energy infrastructure activities.
Midstream energy infrastructure companies usually operate under a ”toll-based” business model. Revenues depend on each unit of transport volume. Therefore, not only the price but demand for oil becomes crucial. If upstream businesses stopped production due to declines in prices or demand, then the transportation of oil by midstream companies becomes unnecessary.
USAI, which tracks the returns of the American Energy Independence Index, holds 34 stocks. It started trading in December 2017. As net assets are about $16.1 million, it is still a small fund. More than 60% of the fund is in the top ten names. Oneok (NYSE:OKE), Williams Companies (WMB:NYSE) and Enterprise Products Partners (NYSE:EPD) lead the roster.
The ETF is up about 64% in the past year. If you believe midstream companies are likely to benefit from a potential increase in oil demand in the coming quarters, you should consider buying the dips.
Renewable Energy Group (REGI)
52-Week range: $19.60 – $117.00
Dividend yield: N/A
Iowa-based Renewable Energy Group is focused on providing cleaner, lower carbon intensity products and services. REGI is one of the largest renewable and bio-diesel producers in North America. Its operations include acquiring feedstock, operating biorefineries and marketing and distributing renewable fuels.
Renewable Energy Group released fourth quarter and full year results on Feb. 25. Revenues decreased to $548 million, a 45.3% decline YoY. The drop came as a result of the GAAP recognition of previous biodiesel mixture excise tax credits (BTC) net benefit to revenue. GAAP net income was $27 million, or 60 cents per diluted share, compared to $476 million, or $11.15 per diluted share, in the prior year quarter. At the end of 2020, cash and equivalents stood at $358 million.
CEO Cynthia Warner cited, “REG’s resilient business model enabled us to deliver strong financial results, with $120 million of net income from continuing operations” for the fiscal year.
Over the past year, REGI stock is up more than 176%. Forward P/E and P/S ratios stand at 16.26 and 1.26, respectively. Future weeks could see profit-taking in the shares. Those investors who expect robust growth prospects in the biofuel space could consider buying REGI as long as it’s around $70 or below.
VanEck Vectors Oil Refiners ETF (CRAK)
52-Week range: $17.80 – $29.51
Dividend yield: 2.32%
Expense ratio: 0.60% per year
The VanEck Vectors Oil Refiners ETF provides exposure to global firms involved in crude oil refining. The fund started trading in August 2015 and net assets stand at $20 million.
The ticker “CRAK” is a reference to refinery “crack spread.” According to exchange operator CME (NASDAQ:CME):
“In the petroleum industry, refinery executives are most concerned about hedging the difference between their input costs and output prices. Refiners’ profits are tied directly to the spread, or difference, between the price of crude oil and the prices of refined products — gasoline and distillates (diesel and jet fuel). This spread is referred to as a crack spread.”
CRAK, which tracks the MVIS Global Oil Refiners Index, has 25 holdings. The top ten businesses make up over 62% of funds. From a geographic point of view, companies from the U.S. top the list with 23.11%. Next in line are Japan (13.18%), South Korea (9.24%), Finland (7.95%) and India (7.17%).
Finland-headquartered refiner Neste Oyj (OTCMKTS:NTOIY), South Korean SK Innovation and Indian energy giant Reliance Industries (OTCMKTS:RLNIY) are at the top of the roster. Over the past year, CRAK is up by 44%. Investing in CRAK means a bet on the profitability of global refineries in the coming quarters.
Vanguard Energy ETF (VDE)
52-Week range: $36.62 – $75.60
Dividend yield: 3.66%
Expense ratio: 0.10% per year
Our last pick is also an ETF, namely the Vanguard Energy Index Fund. It invests in businesses that focus on the exploration and production of energy products, including oil, natural gas and coal. This fund started trading in September 2004 and has net assets of $4.4 billion.
VDE, which holds 99 stocks, tracks the returns of the MSCI US Investable Market Energy 25/50. As far as industries are concerned, funds are distributed among Integrated Oil & Gas (42.9%), Oil & Gas Exploration & Production (22.9%) and Oil & Gas Storage & Transportation (11.9%).
Exxon Mobil, Chevron and ConocoPhillips (NYSE:COP) are the top holdings in the fund. In the past year, VDE is up over 52%. Investors could consider buying this ETF, especially if there is a decline toward $65.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.