3 Energy Stocks That Are Great Picks Right Now

A lot of people are energy investors in that they own a few shares of a big oil company like ExxonMobil — either outright or through an index fund. But there's a whole world of energy investments that can be a lot more interesting. Finding those investments, though, and figuring out how best to navigate the energy sector can be more difficult.

With that in mind, we asked three of our Motley Fool contributors for their top energy stock picks. They came back with NextEra Energy Partners (NYSE: NEP), Liberty Oilfield Services (NYSE: LBRT), and Magellan Midstream Partners (NYSE: MMP). Here's why they think these are good energy picks right now.

An energy dividend built to last

Travis Hoium (NextEra Energy Partners): As the energy landscape changes for electric utilities, investors have to adapt as well. Coal and nuclear are in a long-term decline, and natural gas now has renewable energy nipping at its heels. Betting on old technologies has been a losing wager for more than a decade now, and NextEra Energy Partners is not only a company betting on the future with wind and solar, it also comes with a rock-solid 4.1% dividend yield.

NextEra Energy Partners is the yieldco arm of NextEra Energy, the largest wind and solar generator in the world. The utility develops or buys renewable energy assets and can drop them down to the yieldco when the time is right. Over time, if NextEra Energy Partners acquires renewable energy projects that generate a higher return than their cost of capital (debt plus equity), it'll be able to grow the dividend. You can see below that the dividend has grown steadily the last few years, and that's expected to continue with dividend growth of 12% to 15% through at least the end of 2024.

NextEra Energy Partners is betting on the right technology with wind and solar. And it has an average of 16 years remaining on contracts to sell electricity to utilities, and over eight years of tax-free distributions as it returns capital to shareholders. This is an energy stock, and dividend, that I want to own no matter what happens with the energy transition over the next decade.

Once a buy, still a buy

Rich Smith (Liberty Oilfield Services): Last month — just a couple of weeks ago, in fact — I called out Liberty Oilfield Services as my favorite pick among energy stocks. Two weeks later, Liberty Oilfield stock is down 11%.

So what's a value investor to do when that happens? Call me a glutton for punishment, but I'm going to double down at this lower price.

Despite what the stock price might suggest, Liberty Oilfield's business is doing better than expected right now, not worse. Sure, when Liberty reported Q2 earnings last week, GP profits tumbled 55% to just $0.32 per share. That being said, Wall Street was only looking for Liberty to earn $0.27 per share, so in fact, the company beat earnings — hardly a justification for an 11% haircut in share price.

Reduced Q2 profits also changed the valuation proposition on the stock — but perhaps not as drastically as one might think. Although valued on its reduced net income under generally accepted accounting principles (GAAP), Liberty shares now appear to cost a pricey 50 times earnings, free cash flow (FCF) didn't take much of a hit at all. As a result, the stock's $1.3 billion implied market capitalization is only about 14 times FCF — a bargain if Liberty succeeds in more than doubling FCF over the next couple of years, as analysts forecast.

And with management reassuring investors in its last forecast that “we are focused on generating strong returns on capital and free cash flow in 2019,” I'd say that the chances of Liberty doing what analysts hope it will do still look pretty good.

A consistent cash generator

John Bromels (Magellan Midstream Partners): Some investors may be getting a bit nervous about the future of Magellan Midstream Partners, a pipeline master limited partnership (MLP). It has numerous projects coming on line this year; beyond that, however, a couple of high-profile cancellations have caused some concern. But I think now is still a good time to hop aboard Magellan's cash flow express.

Magellan has a number of projects coming on line by the end of the year, which will help the company boost its distributable cash flow (DCF). In fact, 2019 is slated to be the company's biggest year ever for capital spending, and it's not even close. In each of the last two quarters — Q1 and Q2 of 2019 — Magellan has raised its DCF guidance for the year.

This is so important because MLPs pay out almost all of their DCF as distributions to unitholders. The more DCF a company generates, the bigger the payouts to investors are likely to be. While Magellan is reserving some of its DCF for additional capital spending, the bulk is headed to investors in the form of a distribution that's already yielding 6.1%. And the company has upped its distribution every quarter for 18 years, a streak management surely isn't planning on breaking anytime soon.

The one thing that might be troubling to some investors is that once its current spate of expansion projects comes on line, Magellan hasn't identified another big series of growth projects. On the most recent earnings call, CEO Michael Mears downplayed the situation, stating that the company has more than $500 million of potential projects it's considering.

Mears and his team have done an excellent job of steering Magellan through the last eight years, which have included some rocky times in the oil and gas sector, so I have faith that they'll continue to execute well. And given the company's hefty yield and the fact that its valuation metrics are near the low end of their historical ranges, now looks like a good time to bet on this proven outperformer.

Read more at Yahoo Finance.

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