Energy stocks have been battered in 2019 as crude oil prices hovered above the $50 a barrel range, hampered by a leveling off of demand and trade concerns weighing on the markets. The increasing amount of debt held by exploration and production companies has also made investors wary. Energy stocks are mostly tied to the price of oil, which can be pretty volatile, says Mike Loewengart, chief investment officer at E-Trade Financial. Depending on the outcome of geopolitical issues and demand, energy stocks can “allow for greater growth over the long run,” he says. These seven energy stocks offer growth potential, as the U.S. is predicted to be a net energy exporter after 2020.
Cheniere Energy (ticker: LNG)
The best growth stock in energy is Cheniere Energy, a liquefied natural gas provider that has exported more than 750 LNG cargoes to more than 25 countries, says Rob Thummel, a managing director and senior portfolio manager at Tortoise Capital Advisors. U.S. LNG exports will be key as the world looks to lower carbon emissions, he says. The U.S. is expected to become the global leader in LNG and Cheniere is becoming one of the largest LNG providers in the world. Cheniere's cash flow has grown to $3 billion in 2019. The Houston-based company is expected to grow to almost $6 billion over the next several years as the company builds out a strategic U.S. LNG export platform, Thummel says.
ConocoPhillips has growth potential. The Houston-based oil and gas producer increased its 2019 share repurchases to $3.5 billion and has strong free cash flow generation, with $1.7 billion of free cash flow in the second quarter, says Mike Morey, the chief investment officer at Integrity Viking Funds. The energy company returned 42% of cash flow from operations to its shareholders and generates a 2% dividend yield. The stock hit a low of $50 in August but has bounced back. UBS analyst Lloyd Byrne, which upgraded ConocoPhillips to “buy” with a price target of $75, says production will continue to grow. “The Eagle Ford can sustain growth for the next decade-plus, while the Bakken [Formation] can sustain flat production for a decade-plus, in our view,” he wrote in a recent report.
EOG Resources (EOG)
A crude oil and natural gas company with exploration and production companies in the U.S., with proved reserves domestically and abroad in Trinidad and China. EOG Resources retired $900 million in debt in June with cash on hand and is on track to meet its planned $3 billion in debt reduction by 2021. EOG Resources generated $350 million in free cash flow in the second quarter of 2019, raised its dividend 31% for the second consecutive year and generated a peer-leading return on capital employed of 15% and a rate of return of 28%. Morey says investors should seek out energy companies that are well-capitalized, possess strong free cash flow and return capital to its shareholders.
Helmerich & Payne (HP)
Helmerich & Payne has produced 47 consecutive years of increasing dividends. The Oklahoma-based drilling company generates a 6% dividend yield. As an industry leader in U.S. land drilling, the company has a strong balance sheet with only 10% for its debt to capital ratio. Helmerich & Payne returned over $1.5 billion to shareholders through dividends and share repurchases since 2014. The company's stock has a wide 52-week range as energy stocks have been volatile. The stock reached a low of $36 from a high of $73. Helmerich & Payne reported adjusted quarterly earnings of 40 cents a share, beating its loss of one penny from a year ago. The company's operating revenue of $688 million is an increase of 6% from a year ago.
Chevron Corp. (CVX)
Energy behemoth Chevron will return $13 billion to shareholders this year between dividends and share repurchases or a 6% total shareholder yield. Chevron's assets in the Permian Basin in West Texas “benefits from a strong balance sheet that can withstand short term volatility,” wrote Barclays analyst Jeanine Wai in a September report. Barclays has a $145 price target. While the Permian produces a “very long value chain,” Chevron's downstream, LNG trading and chemicals business units maximize returns and shareholder value in the basin compared to its smaller peers, Wai wrote. The energy sector can provide investors with a mix of growth potential and the added value of dividend payments. “Moving the growth needle can be more difficult in comparison to a big tech stock,” Loewengart says. “Some examples in the sector are Exxon Mobil and Chevron.”
Devon Energy (DVN)
Devon Energy, an Oklahoma-based energy company, is committed to sustainable free cash flow, according to Wai. Management's commitment to generating free cash flow at conservative oil prices is a plus, she wrote. Lower oil production growth closer to 10% compared to 15% is not an amount that the market “should balk at,” Wai adds. The company's efficiency, strong performance and conservative approach to budgeting means that Devon could be “setting itself up to be a 2020 beat and raise story, and we like the messaging of optimizing free cash flow with growth,” she says. Barclays has a $38 price target. Operating cash flow in the second quarter rose to $623 million, a 23% increase compared to the same period a year ago and produced $59 million of free cash flow in the quarter.
Exxon Mobil Corp. (XOM)
Energy giant Exxon Mobil has a market cap of over $300 billion and generates a hefty dividend of 4.8%. The company has both exploration and production units and refineries, plus petrochemical plants. Unlike other integrated oil companies that have cut back on capital expenditures, Exxon is going to increase capital spending, wrote Morningstar senior equity analyst Dave Meats in a report. The additional spending is predicted to double both earnings and cash flow by 2025 from its 2017 levels, he says. Exxon Mobil plans to produce a return on capital of 15%, aiming to almost double the 9% in 2018. The company remains the highest-quality integrated company and that its downstream and chemicals segments set it apart from its competitors and is “one of the better operators and developers in the world,” he adds.
Best energy stocks for growth investors:
- Cheniere Energy (LNG)
- Conoco Phillips (COP)
- EOG Resources (EOG)
- Helmerich & Payne (HP)
- Chevron Corp. (CVX)
- Devon Energy (DVN)
- Exxon Mobil Corp. (XOM)