Energy stocks have seen robust returns in 2021. Thanks to rising oil prices, their cash flows have mostly skyrocketed. As a result, many of them have returned a significant portion of their excess cash to shareholders in hefty dividends. Now investors wonder what could be next for energy shares, which have fared better that the broader market.
So far in the year, the S&P 500 Energy Sector index has surged more than 44%. Meanwhile, the widely-followed Energy Select Sector SPDR ETF (NYSEARCA:XLE) has gained nearly 45% year-to-date (YTD) compared to the S&P 500 index’s overall return of almost 21%.
Yet, the rally in oil and energy stocks abruptly came to a halt last week. News about the highly infectious omicron variant led to a significant selloff in energy stocks. In a matter of days, oil prices crashed by $10 per barrel, pushing down shares of companies across the industry.
Brent crude oil has since plunged in price to less than $70 per barrel. The crash came when energy stocks were already on edge after the U.S. government pledged to release millions of barrels of oil from strategic reserves to reduce prices.
Meanwhile, renewable energy sources, such as solar and wind, continue to grow in popularity at a rapid pace. But the transition to clean energy could take more than a decade. Even as their share of the total energy pie shrinks, oil and gas demand is forecast to grow on an absolute basis over the next couple of years.
With that information, here are seven energy stocks that are primed to gain traction in December:
- ConocoPhillips (NYSE:COP)
- Devon Energy (NYSE:DVN)
- Enbridge (NYSE:ENB)
- Enphase Energy (NASDAQ:ENPH)
- Equinor (NYSE:EQNR)
- Global X MLP ETF (NYSEARCA:MLPA)
- SunPower (NASDAQ:SPWR)
Energy Stocks: ConocoPhillips (COP)
52-week range: $38.77 – $77.98
Dividend Yield: 2.66%
In 2020, the Houston, Texas-based oil major ConocoPhillips produced 727,000 barrels of oil and natural gas liquids per day as well as 2.4 billion cubic feet of natural gas per day. The energy giant is the largest crude oil producer in Alaska.
ConocoPhillips announced solid third-quarter results in early November. Revenue increased 165% year-over-year (YOY) to $11.6 billion. Adjusted earnings came in at $2.4 billion, or $1.77 per share, compared with an adjusted loss of $331 million, or 31 cents loss per share, in the prior-year quarter. Cash and equivalents ended the period at $10.2 billion.
“This positive performance momentum established an exceptional platform for the pending acquisition of Shell’s Permian properties that we announced in the quarter and expect to close in the fourth quarter. This transaction will spur another phase of positive performance as we head into 2022.”
ConocoPhillips has benefited from increasing oil prices, generating $2.8 billion in free cash flow in Q3. Thus, it seems on track to return $6 billion in cash to investors in 2021.
COP stock is around $70 per share, up nearly 75% YTD. Shares are trading at 8.4 times forward earnings and 2.5 times trailing sales. The 12-month median price target is $90. Interested readers could buy around these levels.
Devon Energy (DVN)
52-week range: $13.39 – $45.56
Dividend Yield: 1.05%
Based in Oklahoma City, Devon Energy is one of the largest energy explorers and producers stateside. It also transports oil and gas, and the company processes natural gas.
Devon released Q3 results in early November. Total revenue increased 225% YOY to $3.5 billion. Net earnings came in at $838 million, or $1.24 per diluted share, compared to a net loss of $92 million, or 25 cents loss per diluted share, a year ago. Cash and equivalents increased by $782 million to a total of $2.3 billion.
On the results, CEO Rick Muncrief remarked, “The power of Devon’s asset portfolio and disciplined cash-return strategy was evidenced by another quarter of operational and financial outperformance … The team’s outstanding execution, coupled with an improved cost structure, has allowed us to fully capture the benefits of rising commodity prices and deliver robust growth in free cash flow.”
Devon Energy continues to cash in on higher crude prices. Free cash flow has soared eight-fold from the end of 2020 to $1.1 billion. In addition to a dividend increase, the board also authorized a $1 billion share repurchase program.
DVN stock currently hovers just above $40 per share, up 157% YTD. Shares are trading at 8.4 times forward earnings and 2.8 times trailing sales. The 12-month median price target stands at $51.
Energy Stocks: Enbridge (ENB)
52-week range: $31.61 – $43.35
Dividend Yield: 7.2%
Canada-based Enbridge is a North American energy infrastructure giant that owns and operates oil and natural gas pipelines, a natural gas utility operation and renewable power assets. Its midstream assets transport around a quarter of total crude oil production in North America.
Enbridge released Q3 results in early November. It reported adjusted earnings of 1.2 billion CAD, or .59 CAD per share, compared with 961 million CAD in the prior-year quarter. Cash provided by operating activities stood at 2.2 billion CAD.
After the announcement, CEO Al Monaco said, “In the third quarter, the business delivered strong operational performance and financial results across our four franchises. Our low-risk business model continues to generate predictable results and execution on our strategic priorities is driving solid cash flow growth and per share results.”
Enbridge boasts a fee-based business model that shields revenue from volatility in commodity prices. As a result, prices of oil and natural gas have little impact on its performance compared to the demand for these fuels. Next year, the energy giant expects to generate more than $2 billion in cash flow.
Management has allocated significant funds to renewable energy projects. They include various offshore wind and solar projects, mainly in Europe. The company also runs low-carbon projects focused on sources such as renewable natural gas (RNG) and hydrogen.
ENB stock is around $38 territory, up 19.5% YTD. Shares are trading at 16 times forward earnings and 2.2 times trailing sales. The 12-month median price target is $43.54.
Enphase Energy (ENPH)
52-week range: $108.88 – $282.46
Fremont, California-based Enphase Energy provides an energy management platform, connecting solar generation and energy storage solutions. Customers use an app to save battery power and also monitor system status.
Enphase released Q3 results in late October. Total revenue was a record $352 million, up 96% YOY. The group generated non-GAAP net income of $84 million, or 60 cents per diluted share, up from $41.8 million in the prior-year quarter. Cash and marketable securities ended the quarter at $1.4 billion.
On the metrics, CEO Badri Kothandaraman remarked, ”Strong demand for our microinverter systems continued in the third quarter of 2021, while shipments of our Enphase Storage systems increased approximately 51%, compared to the second quarter of 2021.”
Management recently launched the IQ8 microinverter, which creates a microgrid during power outages. It relies on sunlight and provides backup power even without the use of a battery. Enphase also announced plans to purchase ClipperCreek, which offers electric vehicle (EV) charging solutions.
ENPH shares are in $240 territory, up 33% YTD. The stock is trading at 85 times forward earnings and 30 times trailing sales. The 12-month median price target stands at $280. Potential investors could regard $230 as a better entry point.
Energy Stocks: Equinor (EQNR)
52-week range: $15.33 – $28.30
Dividend Yield: 2.92%
Norway-based Equinor is an integrated oil and gas company. Although it has been publicly listed since 2001, the government of Norway retains a 67% stake. The group operates in the Norwegian Continental Shelf, producing more than 2 million barrels of oil daily.
Equinor released Q3 results in late October. Revenue more than doubled YOY to $23.26 billion. Net income came in at $1.41 billion, or 43 cents per diluted share, compared to a net loss of $2.12 billion, or 65 cents loss per diluted share, in the prior-year quarter. Cash and equivalents ended the quarter at $13.8 billion.
CEO Anders Opedal stated, “We capture value from the higher commodity prices and with a solid operational performance we deliver strong results. Strict capital discipline and a very strong net cash flow strengthen our balance sheet and improve our adjusted net debt ratio to 13.2%.”
High energy prices have expanded Equinor’s margins, helping it generate $6.7 billion in free cash flow in Q3. Management plans to divert excess cash flows toward alternative energy projects. It has ambitious plans to become a leading global name in offshore wind energy.
EQNR stock is around $25 per share, up 52% YTD. Shares seem positioned for further upside, trading at 9.6 times forward earnings and 1.2 times trailing sales. The 12-month median price target is $32.
Global X MLP ETF (MLPA)
52-Week Range: $26.94 – $41.54
Dividend Yield: 8.81%
Expense Ratio: 0.46% per year
Our next choice is an exchange-traded fund (ETF) that focuses on master limited partnerships (MLPs) that transport, store and process oil and natural gas. The Global X MLP ETF gives exposure to leading midstream MLPs worldwide, which collect fees for transporting customers’ oil and other energy commodities. Therefore, MLPs are typically less sensitive to energy prices.
MLPA, which has 20 holdings, began trading in April 2012. The top 10 names in the roster account for 65% of net assets of $980 million. In terms of sectors, traditional storage and transportation of petroleum dominates the fund with 47.77%, followed by gathering and processing at 29.67% and storage and transportation of natural gas at 22.55%.
Analysts note most names in the fund have reported strong quarterly numbers in recent months. Their earnings are growing. Robust free cash flows and declining debt levels also make them attractive portfolio choices.
MLPA has gained 21% YTD. But it has declined more than 10% in the past month. This recent dip offers long-term investors an attractive entry point into the fund.
Energy Stocks: SunPower (SPWR)
52-week range: $19.75 – $57.52
San Jose, California-based SunPower manufactures solar modules manufacturer. It uses crystalline silicon technology and boasts high conversion efficiencies. In October, management announced the acquisition of Blue Raven Solar, a residential solar provider.
The group has also added energy storage services to its portfolio via SunVault. In addition, it has integrated electric vehicle charging services in its offerings through its partnership with Wallbox.
SunPower released Q3 results in early November. Revenue went up by 18% YOY to $324 million. Non-GAAP net income came in at $9.8 million, or 6 cents per diluted share, compared to $6.5 million in net loss, or 4 cents per diluted share, in the prior-year quarter. Cash and equivalents ended the quarter at $269 million. Profit margins also improved significantly.
After the announcement, CEO Peter Faricy remarked, “Our decision to increase our focus on the residential market was validated by strong sequential third quarter solar and storage demand and deployment, combined with continued margin expansion.”
SPWR stock hovers just below $30, up 5% in 2021. Shares are trading at 68 times forward earnings and 4.1 times sales. The 12-month median price target stands near its current price at $27.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.