Energy stocks trailed the market by a significant margin in 2017, with most sinking even though it rose nearly 20%. That's despite the fact that oil rebounded about 8% this year and is now well above its lowest point during the darkest days of the market downturn. Furthermore, crude prices should remain stable, if not head even higher, in the coming year given OPEC's decision to stick with its production reduction agreement through the end of 2018.
These factors suggest that now might be a great time to buy energy stocks. Not only are many much cheaper than they had been, but most have significantly improved their financial profiles so they can flourish in current market conditions. Here are five stocks that stand out as the top option in each energy subsector.
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Steady growth from a low-risk oil stock
U.S. oil giant ConocoPhillips spent the past few years driving down costs so that it could prosper at lower oil prices. Those efforts are beginning to pay off since the company can generate enough cash flow at $40 oil to pay its dividend as well as drill the wells needed to maintain its current production rate. But what makes ConocoPhillips such a compelling buy right now is what it can do when oil is over $50 a barrel. The company recently outlined its three-year operating plan, which would see it increase cash flow by a 10% compound annual rate through 2020 at that oil price, giving it the money to pay a growing dividend and repurchase $1.5 billion in stock each year. It's a differentiated plan that should boost shareholder returns in the coming years even if oil prices decline from their current level, making ConocoPhillips an exceptionally low-risk way to invest in oil.
This top dog is dirt cheap
EQT Corp. recently vaulted to the top of the leaderboard as the largest natural gas producer in the country by acquiring rival Rice Energy. Aside from growing its size, that combination also makes EQT the second-lowest-cost producer in the industry, which should increase its cash flow per share 20% in 2018 and by 30% in 2019.
It was a hard-fought merger because some investors didn't want EQT to use its undervalued stock to help pay for the transaction. However, the company won them over by agreeing to develop a plan that would help address the estimated 50% discount between EQT's market price and the value of its assets. That looming catalyst, when combined with its upside to an improving natural gas market, makes it a top choice for investors looking for an energy stock that could fuel big-time returns.
An absurdly inexpensive income stream
Kinder Morgan is also very undervalued. At the moment, the leading natural gas pipeline company sells for less than nine times cash flow, which is well below the 14.6 times multiple of rivals. That discount comes despite the fact that Kinder Morgan owns a premium energy infrastructure business that generates steady cash flow since fee-based assets support 91% of its earnings. Thanks to the combination of a significant improvement in its financial profile and in-process growth projects, the company is also in the position to deliver best-in-class dividend growth through 2020. That dirt-cheap, fast-growing income stream makes Kinder Morgan a top choice for both value investors and income seekers.
A low-risk, high-yield MLP
Enterprise Products Partners is one of the top MLPs in the country. For starters, it offers investors a nearly 7%-yielding distribution that is on rock-solid ground since it gets 92% of its cash flow from stable sources, and it has the best credit rating among MLPs. In addition, it has a plan to strengthen its already impressive financial situation in the coming years. Its strategy is to grow the payout at a slower pace through 2019 even as it completes $9 billion of fee-based expansion projects, which will enable it to retain a significant portion of future cash flow to finance growth. That will not only increase its margin of safety but reduce its reliance on using the fickle capital markets to secure equity funding for future expansions.
That said, what makes Enterprise such a compelling buy right now is its valuation, which is at its lowest level in quite some time, enabling income investors to lock in an attractive low-risk yield.
A low-risk, high-yield renewable energy option
While oil and gas currently dominate the energy landscape, it's no secret that renewables are stealing market share. That should continue in the future given rising climate change worries and favorable government policies toward cleaner sources. While there are several ways to invest in this high-growth sector, one low-risk way is Brookfield Renewable Partners, which is one of the largest renewable power generators on the planet.
While Brookfield produces the bulk of its power from hydroelectric facilities, it also operates several wind farms and recently took a stake in solar and wind company TerraForm Power. Brookfield's growing portfolio of power facilities generates stable income since it sells about 94% of its power under long-term contracts, which help support its 5.6%-yielding distribution. Meanwhile, like Enterprise Products Partners, Brookfield retains a portion of its cash flow to reinvest in new projects, bolstering its belief that it can grow its already generous payout at a 5% to 9% annual rate over the long term. That growing stream of cash flow makes Brookfield Renewable Partners an excellent clean energy stock to buy and hold for the decades to come.
Have your cake and eat it, too
Many investors choose to avoid energy stocks because they can be very volatile since energy prices often change on a dime. However, this grouping of energy stocks is less risky than most because they are either ultra-low-cost producers or generate the bulk of their cash flow from stable fee-based assets. All five also have strong balance sheets and trade at relatively low valuations, which provides further downside protection. In the meantime, all have ample upside potential thanks to the visible growth prospects that each has on the horizon. That compelling blend of reward for the risk is what makes them excellent choices to consider buying now.
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Matthew DiLallo owns shares of Brookfield Renewable Energy Partners, ConocoPhillips, Enterprise Products Partners, and Kinder Morgan and has the following options: long January 2018 $30 calls on Kinder Morgan, short December 2017 $19 puts on Kinder Morgan, and short March 2018 $17 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.