Energy stocks appeal to investors for a few different reasons.
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During the trailing one-year period, the Morningstar US Energy Index has returned 11.96% while the Morningstar US Market Index has returned 34.16%.
The energy stocks that Morningstar covers look 5% undervalued today.
To come up with our list of the best energy stocks to buy now, we screened for:
The stocks of these energy companies with economic moats are the most undervalued, according to our metrics as of March 11, 2024.
Here’s a little more about each of the best energy stocks to buy, including commentary from the Morningstar analysts who cover them. All data is as of March 11, 2024.
Devon Energy is the cheapest stock on our list of the best energy stocks to buy. This oil and gas exploration and production company has a narrow economic moat rating. Devon Energy is trading 21% below our fair value estimate of $59.00 and offers a 5.19% dividend yield.
Devon Energy is an oil and gas producer based in Oklahoma. It has assets in several shale basins across the United States, including the Delaware Basin, Eagle Ford Shale, STACK, and Powder River Basin. Management has reshuffled the portfolio in the last few years, divesting its Canadian oil sands business and exiting the Barnett Shale natural gas play. In January 2021, it combined with another Oklahoma-based shale firm, WPX Energy, in a “merger of equals” that significantly expanded Devon’s Delaware Basin exposure and added a small position in the core of the Bakken Shale fairway in North Dakota. The merger brought economies of scale and more efficient field operations, and enhanced the competitiveness of the combined firm.
The Delaware Basin offers the best development economics in Devon’s portfolio and will be the primary growth engine for the company. The combined firm has 400,000 net acres of leasehold in the play and derives more than half of its production from there. Management has allocated around 60% of the 2023 capital budget to developing the Delaware and is likely to prioritize the asset in future years as well. That translates to slow and steady volume increases in the basin over time.
How fast firmwide production grows will depend on the trajectory of commodity prices to an extent. But management has pledged to keep growth at 5% or less, even during upcycles (though 2023 guidance implies 7% expansion over 2022). It also intends to spend no more than 70%-80% of cash flows under any circumstances, which means any windfall during periods of higher commodity prices will be returned to shareholders rather than plowed back into new drilling. The firm was the first US exploration and production company to implement a variable dividend to funnel excess cash to shareholders, and the strategy was warmly received by the market when it came into effect in 2021 (when Devon was the top performer in the S&P 500). After 50% of free cash has been distributed in cash the remainder will fund buybacks and strengthen the balance sheet. We prefer cash returns during upcycles, when firms are more flush with cash but also when stock prices are typically higher.
Joshua Aguilar, Morningstar Analyst
Narrow-moat Hess operates in the oil and gas exploration and production industry. This cheap energy stock yields 1.19%. Hess stock is 16% undervalued; we think the stock is worth $176.00.
Hess’ track record for efficiently allocating capital and generating value has been steadily improving. The company has deftly streamlined its portfolio by jettisoning less competitive and riskier positions in Equatorial Guinea, the Danish North Sea, and Libya, and by shifting the focus to more-lucrative oil and gas assets. Today the firm has two major growth assets: its 30% working interest in the Exxon-operated Stabroek block in offshore Guyana, and its acreage in the Bakken Shale play, which is U.S. onshore. Cash flows from its legacy operations in the U.S. Gulf of Mexico and Southeast Asia support Hess’ ongoing investment in these regions.
The firm’s Guyana assets will be an engine for rapid growth in the next few years, differentiating Hess from other independent upstream firms. This asset is a large reason why it is being acquired by Chevron. Slow and steady expansion has become the industry norm, with excess cash being funneled back to shareholders instead of plowed back into the ground. Hess still aims to distribute 75% of its free cash, but heavy upfront spending in Guyana is reducing that cash flow, although it still makes sense given the region’s exceptional economics and the size of the prize in the ground. The block’s gross recoverable resources are a moving target while exploration continues, but the latest estimate is over 11 billion barrels of oil equivalent. For Hess, that translates to an array of large projects. Recent guidance indicates six phases of development all online by 2027, culminating in gross volumes over 1.2 mmb/d. This includes two phases that have already been sanctioned and two that are currently producing. Even that feels conservative, with over 30 discoveries to date. We model 10 phases.
Hess is also one of the largest producers in the Bakken Shale. This includes a large portion in the highly productive area near the Mountrail-McKenzie county line in North Dakota. Management intends to develop this asset with a four-rig program that will optimize the usage of its infrastructure and expects production to reach 200 mboe/d in 2025, then plateau near that level for almost a decade.
Stephen Ellis, Morningstar Strategist
HF Sinclair is 16% undervalued relative to our $67.00 fair value estimate. This top energy stock from the oil and gas refining and marketing industry yields 3.28% and earns a narrow moat rating.
After the acquisition of Sinclair Oil, HollyFrontier, now HF Sinclair, is a fully integrated independent company composed of refining, marketing, renewables, specialty lubricants, and midstream businesses.
Its refining footprint has grown to seven refineries totaling 678 mb/d in total capacity, including the recently acquired Puget Sound refinery. The latter deal extends the company’s footprint to the West Coast, beyond its historical midcontinent and Rockies roots and into a more difficult refining market with less competitive advantages. However, the foothold in the West Coast should help with the growing renewable diesel business given the region’s growing biofuel mandates.
The Sinclair acquisition extends HF’s push into renewable diesel, adding a production facility and pretreatment project. Combined with HF’s existing projects (two RD units and a pre-treatment unit), it now can produce 380 million gallons annually and expects future growth.
Adding Sinclair’s marketing group of over 300 distributors, 1,500 wholesale brand sites, and 2 billion gallons a year of branded sales adds a stable earnings stream HF previously lacked as a merchant refiner. In addition, it offers the ability to generate RINs whose high costs have put HF at a disadvantage in the recent past.
HF Sinclair had already begun to diversify its earnings when it acquired the Petro-Canada lubricants business, Red Giant Oil, and Sonneborn to diversify its earnings stream. It expects the segment to generate $250 million EBITDA annually while also serving as a platform for future growth.
At the same time, HF added Sinclair’s midstream assets including 1,200 miles of pipelines, eight product terminals with 4.5 mm/b of storage, and interests in three pipeline joint ventures. The incremental EBITDA of $70 million-$80 million will increase total midstream segment annual EBTIDA to about $450 million while opening up future organic and external transaction growth opportunities.
Allen Good, Morningstar Director
Plus earnings we’ll be watching for and what we think of Nvidia after another blowout quarter.
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This narrow-moat energy company operates in the oil and gas equipment services industry. Schlumberger stock offers a 2.13% dividend yield and trades 14% below our fair value estimate of $60.00.
SLB, formerly named Schlumberger, is the largest oilfield services provider in the world, with a product portfolio that addresses nearly every end market in the industry. The firm has developed an impressive reputation as one of the leading innovators in oilfield services. Roughly 20% of its annual revenue comes from new technology, and the efficiency gains well operators realize through SLB’s services have earned the firm dominant market share in several categories, including wireline services, production testing, and logging-while-drilling.
Moving forward, SLB is targeting integrated services and digital solutions. Its Asset Performance Solutions, or APS, business allows well operators to completely outsource project management to SLB. APS increases operational efficiencies for all parties by reducing informational friction and time delays that tend to occur when contracting project stages to different service firms. The end result is reduced project costs and quicker time to production. SLB’s DELFI ecosystem also represents significant opportunities for margin expansion by providing an asset-light, highly scalable software platform that improves project efficiency while augmenting SLB’s already-impressive knowledge base.
The firm also aims to localize its expertise through its “fit-for-basin” approach. SLB intends to deepen relationships with its customers by creating solutions tailored to regional or individual customer requirements. The firm aims to develop technology with high in-country value that solidifies SLB’s international market access in the long run.
Stephen Ellis, Morningstar Strategist
Chevron rounds out our list of the best energy stocks to buy. This stock looks 12% undervalued compared with our $172.00 fair value estimate. This oil and gas integrated company earns a narrow moat rating. The stock yields 4.29%.
We expect Chevron to deliver higher returns and margin expansion thanks to an oil-leveraged portfolio as well as the next phase of growth, which is focused on developing its large, advantaged Permian Basin position.
Its latest capital plan maintains its focus on capital discipline without sacrificing growth. Thanks to improved cost efficiencies and the acquisition of Noble Energy, Chevron plans to grow production to nearly 4.0 million barrels of oil equivalent per day by 2027 from about 3.0 mmboe/d in 2023. New volumes will largely come from new production from its differentiated Permian Basin position (size, quality, and lack of royalties), where it expects to grow volumes to 1.25 mmboe/d by 2027 from about 700 mboe/d in 2022 while delivering returns of nearly 30% and about $5 billion of free cash flow by 2027.
Chevron's Permian growth will be supplemented by expansion projects at Tengiz in Kazakhstan, due to begin producing in mid-2023, new developments in the Gulf of Mexico, and potential new discoveries in Mexico and Brazil. Chevron also now has growth options with offshore gas fields in the Eastern Mediterranean with the Noble acquisition.
Oil and gas prices will dictate Chevron’s earnings and cash flow for the foreseeable future. However, the company is investing in low-carbon businesses to adapt to the energy transition. It recently tripled its investment to $10 billion cumulatively by 2028, with this capital flowing to emerging low-carbon areas that fit with Chevron’s existing value chains and experience. Greenhouse gas reduction projects and carbon capture and offset will enable Chevron to achieve its emission targets while investments in hydrogen and renewable fuels will give it a toehold in emerging businesses that could expand in the future.
Chevron expects the combination of new higher-margin projects along with ongoing cost reductions and operational improvements to drive return on capital employed to above 12% by 2027. Meanwhile, strong free cash flow will go toward steady dividend growth and repurchases, demonstrating management’s ongoing commitment to capital discipline and shareholder returns.
Allen Good, Morningstar Director
A company with an economic moat can fend off competition and earn high returns on capital for many years to come.
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Energy stocks are important for investors to understand because the energy sector is vital to the global economy. It produces and supplies the fuels and electricity needed to keep the economy humming.
Image source: Getty Images.
The energy industry includes companies involved in the following activities:
These companies manufacture components to produce electricity using renewable resources such as solar, wind, hydroelectric, and geothermal power. They also include companies that operate and develop renewable energy-generating facilities.
These companies focus on finding, producing, transporting, storing, refining, and exporting fossil fuels.
This broad industry is crucial to providing the economy with the energy it needs. It's also an important one for investors to understand.
Hundreds of public companies focus on the production and distribution of energy. However, a few leaders stand out because of their size and financial strength. Here are five of the best energy stocks to consider buying in 2024:
COMPANY TICKER WHAT IT DOES Brookfield Renewable (NYSE:BEP)(NYSE:BEPC) Globally diversified renewable energy producer. ConocoPhillips (NYSE:COP) Globally diversified oil and natural gas producer. Chevron (NYSE:CVX) A globally diversified and integrated energy company. NextEra Energy (NYSE:NEE) Leading utility and renewable energy producer. Enbridge (NYSE:ENB) Leading pipeline and utility company.Here’s a closer look at some of the best energy stocks in the industry:
Brookfield Renewable is a leading global renewable energy energy producer. It operates hydroelectric, solar, wind, and energy transition assets. The company sells the power produced by these assets under long-term fixed-rate power purchase agreements (PPAs) to electric utilities and other large power users.
The contracts enable Brookfield to generate relatively steady cash flows. It pays out a large portion of that money to investors via an attractive dividend. The company retains the balance to acquire, develop, and expand its renewable energy operations.
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Brookfield Renewable has an enormous backlog of renewable energy development projects. Combined with other growth drivers such as acquisitions and higher power prices, Brookfield expects to increase its funds from operation (FFO) per share by more than 10% annually through 2027. That should support 5% to 9% annual dividend growth, making Brookfield an excellent renewable energy dividend stock.
ConocoPhillips is a diversified oil and natural gas producer. It has operations around the world and uses several methods to produce oil and natural gas.
ConocoPhillips stands out for its low operating costs. It has an average cost of supply of $32 a barrel. ConocoPhillips complements its low cost of supply with a strong balance sheet. It has an investment-grade bond rating backed by a low leverage ratio. That provides it with plenty of cushion to weather frequent periods of low oil and gas prices.
ConocoPhillips’ low operating costs position it to generate significant cash flow in the coming years. The oil and natural gas company estimates it can produce a cumulative $115 billion in free cash flow over the next decade, assuming oil prices average $60 per barrel. With oil prices well above that level as of mid-2023, ConocoPhillips could generate an even bigger gusher of free cash flow.
The company anticipates returning a significant portion of its windfall to investors in the coming years. It plans to send them $11 billion in 2023 alone, thanks to higher oil prices. ConocoPhillips uses a variety of methods to return cash to shareholders, including share repurchases, paying a growing quarterly dividend, and making variable return of cash payments (an incremental dividend payment from its excess cash) as it generates excess cash due to higher oil prices.
Definition IconCommodities are undifferentiated products. They are distinct from branded products like cars, watches, or smartphones, which are generally identified by the company that makes them.
Chevron is a leading global energy company. It boasts a globally integrated oil and gas business that includes exploration and production assets, refining capabilities, and a chemicals business. The company’s large scale and integrated operations help it weather the volatility in the energy sector.
Chevron uses the cash flows generated from its legacy oil and gas operations to pay a growing dividend, repurchase shares, and invest in the future. Chevron increased its dividend for the 36th straight year in 2023. It also plans to buy back between $10 billion and $20 billion of its stock each year.
Part of Chevron’s investment in the future is in reducing its carbon emissions. The company is investing in carbon capture and storage technology, as well as green hydrogen. It also acquired Renewable Energy Group in 2022 for $3.15 billion to bolster its renewable fuels capabilities. The deal will accelerate Chevron’s ability to achieve its goal of expanding its renewable fuels production capacity to 100,000 barrels per day by 2030.
Overall, Chevron aims to supply the fuels for today’s economy while building toward the lower-carbon fuels it requires in the future. The balance makes it an ideal choice for investors seeking a way to invest in the energy transition from fossil fuels to cleaner alternatives.
NextEra Energy is one of the country's largest electric utility companies. It's also a global leader in producing power from the wind and sun through its energy resources segment, which sells clean energy to other utilities and end users around the country.
These businesses generate relatively stable cash flow. It sells and distributes power backed by government-regulated rates and fixed-price PPAs with customers. The business model is very resilient because businesses and households need a steady supply of power.
NextEra Energy has one of the best financial profiles in the electric utility sector. It features one of the highest credit ratings in its peer group. NextEra also has a conservative dividend payout ratio for a utility, allowing it to pay a stable and growing dividend. The company expects to increase its payout at a 10% annual rate through 2024, making it an excellent renewable energy dividend stock. Its strong financial profile also allows it to make significant investments for the future.
The company launched its Real Zero plan in 2022 to eliminate carbon emissions from its operations by 2045. NextEra will significantly increase its solar energy production, maintain its nuclear energy fleet, and replace natural gas in its power plants with green hydrogen and renewable natural gas. These investments should boost its earnings while eliminating its emissions, producing a win-win outcome for shareholders and the planet.
Definition IconCapital is any type of asset that you can use to generate future value, including cash and tangible and intangible assets.
Enbridge is one of the largest energy infrastructure companies in North America. It has four core operating segments:
Enbridge's leading energy infrastructure portfolio generates very stable cash flow backed by long-term contracts and government-regulated rate structures. The company distributes 60% to 70% of that steady cash to investors via a very attractive dividend. It retains the rest to help finance its continued expansion.
The company has a multibillion-dollar backlog of commercially secured expansion projects under construction, giving it lots of visibility into future growth. Enbridge expects its cash flow per share to increase by about 3% per year through 2025 and at a roughly 5% annual rate over the medium term.
Enbridge's growing cash flow should allow it to continue increasing its dividend. The company delivered its 28th consecutive annual dividend increase in 2022.
The energy sector is a challenging one for investors, especially when it comes to oil and natural gas companies. Energy prices can change in a heartbeat. Volatility can have a massive impact on the sector, as well as on the global economy.
We’ve seen examples of the volatile market in recent years. Oil and natural gas prices plunged during the early days of the COVID-19 pandemic as demand dried up. They rebounded sharply in 2021 as consumption recovered. Energy prices continued their ascent in 2022, hitting new highs after Russia invaded Ukraine. However, they began to cool off in late 2022 and into 2023 on concerns that the global economy was slowing down.
Because of the impact commodity price volatility can have on the energy sector, investors need to understand how to invest in energy stocks. That includes keeping risks in mind and not allocating too much of a portfolio to one energy stock or the entire industry. Investors should focus on oil and natural gas companies with the financial and operational strength to survive if industry conditions significantly deteriorate.
Factors that increase an energy company's durability include:
Energy companies with these characteristics will be in a better position to withstand the inevitable cyclical downturns. That means they will still be around when market conditions improve. They will also have more flexibility than their weaker peers to capture opportunities that can create value for their investors.
The energy sector is vital to the global economy because it provides the fuel and power needed to drive trade and travel. However, when the economy slows, as many fear will happen in 2023, it can have a major impact on energy demand and prices. That can put significant weight on energy stock prices.
The best energy stocks to buy are those that can easily survive a downturn and thrive when market conditions improve. Energy stock investors should also consider putting more attention on cleaner energy companies using renewable sources. Focusing on renewables is especially important during the Biden administration, given its pledge to put the country on a path toward an emissions-free future.
A few leaders stand out because they’re larger in size and have strong financial profiles. Here are a few of the top energy companies to consider:
The energy sector is vital to the global economy because it provides the fuel and power needed to drive trade and travel. However, when the economy slows, as many fear will happen in 2023, it can have a major impact on energy demand and prices. That can put significant weight on energy stock prices.
Conversely, when the economy hits the accelerator, demand soars and usually takes prices up with it. Because of that, investors should focus on the stocks of companies that can easily survive a downturn. In addition, they should consider focusing more attention on cleaner energy companies using renewable sources.
The best utility investments are companies with a top-notch financial profile and visible growth prospects. Each of the companies below meets those criteria and has the potential to produce above-average total stock returns -- dividend yield plus stock price appreciation.
Here is a list of standout companies, followed by our assessment of each investment:
American Water Works is the largest publicly traded water and wastewater utility in the U.S.
Brookfield Infrastructure Partners owns a diversified portfolio of infrastructure businesses.
NextEra Energy operates regulated electric utilities in Florida. It also owns a nonregulated competitive energy business that operates natural gas pipelines and renewable energy projects.
Matthew DiLallo has positions in Brookfield Renewable, Brookfield Renewable Partners, Chevron, ConocoPhillips, Enbridge, and NextEra Energy. The Motley Fool has positions in and recommends Brookfield Renewable, Enbridge, and NextEra Energy. The Motley Fool recommends Brookfield Renewable Partners and Chevron. The Motley Fool has a disclosure policy.
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