With oil prices rising thanks to uncertain macroeconomic conditions, many investors are hunting for top energy stocks to capitalize on. But it’s important to remember that oil prices aren’t always riding high — their brief dip below zero a few years ago is easily forgotten.
They generally tend to be tied to the global economy, rising when things are humming along and energy demands are high and falling when belt-tightening leads to reduced activity. The current economic status of many countries around the world has kept a lid on prices, but tensions between Ukraine and Russia together with the outbreak of violence in Israel and Gaza means prices have quite a bit of support right now.
When it comes to energy, net zero should always be a consideration. Countries around the world have pledged to hit net zero by 2050, and that’s slowly creeping up on us. While there’s been some caution about rushing into a lower-carbon economy, the pledge remains intact. That means a lot of investment will be funneled into low-carbon energy sources. That means anyone looking for top energy stocks should be considering some of the lower-carbon producers as well as fossil fuel providers.
So here are the top energy stocks to watch for the final quarter of this year.
British Petroleum (BP)
When it comes to investing in fossil fuels, British Petroleum (NYSE:BP) is one of the better choices for investors with a long timeline, making it one of the top energy stocks to watch. The group’s likely to see a bump in its cash flow in upcoming quarters thanks to the higher price environment we’re seeing right now.
But BP is also in a strong position if conditions start to soften. The group is able to grow its dividends by about 4% even if oil prices fall to $60 per barrel. Given the group’s hefty dividend yield is one of the main reasons investors buy it, that should be reassuring for those looking to hold on to the stock for the long term.
For now, the group is firmly focused on its high-emissions fossil fuel operations, and it recently walked back some of its more aggressive climate pledges. However, BP is still planning to grow its lower carbon and renewable energy businesses, a positive for those looking ahead to a net-zero future.
Brookfield Renewable (BEP)
If you’re looking for top energy stocks to watch as we transition toward net zero, Brookfield Renewable (NYSE:BEP) should be somewhere at the head of the list. That’s because the group is a pure play on the energy transition, but it also boasts diversity. It’s made up of several different low-carbon projects ranging from renewable like wind and solar to energy storage. It’s one of the only pure plays investors can get without dipping into some of the murkier, and riskier, corners of the investing world.
The group’s business is supported by relatively reliable cashflows, thanks to long-term power purchase agreements (PPAs). The PPAs are essentially contracts to sell the power it’s producing from its low-carbon projects, and the fact that they stretch well into the future means the group is able to plan ahead quite effectively.
It also backs up the group’s near 6% dividend yield and offers investors a bit more certainty than some of the other renewables-focused shares on the market.
SSE (SSEZY)
SSE’s (OTCMKTS:SSEZY) unique business comes with classic predictable utility revenues and a hefty dose of future growth potential making it one of the top energy stocks to watch. The group’s network business delivers power throughout the UK and comes with the classic, reliable revenues that utility investors are looking for. However, the group is also in the midst of pivoting its business toward renewables, with a focus on wind assets.
So far, this has been a difficult transition as unfavorable weather conditions have hit output considerably. That’s left other parts of the business to pick up the slack, and created concern among investors that if Mother Nature doesn’t play ball the group may not hit its full-year goals.
However these concerns are already priced in, and the group’s valuation doesn’t accurately reflect the potential that lies ahead as renewables become a much larger part of the energy mix. Although it could be a rocky road in the near term, long-term investors could pick up a bargain if they’re prepared to wait out the ups and downs.
On the date of publication, Marie Brodbeck did not hold (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.
