The energy stocks sector is fairly broad. It includes stocks in companies that produce or supply energy by its most all-encompassing definition. Often it is used to describe oil exploration and production (E&P) companies. Less often, the discussion of energy stocks includes all of the other participants in the oil and gas value chain and power utilities companies like those in renewable energy and coal.
This article will forgo the oil majors in favor of the less-often discussed parts of the supply chain in oil and gas. My logic is that investors who expect that increased oil and gas demand will stoke a need for the services these firms provide. It will also touch upon renewable energy and coal, as again, energy isn’t just big oil.
Bearing all that in mind, let’s take a look at the best of the best in energy stocks as July kicks off.
- DHT Holdings (NYSE:DHT)
- Altus Midstream (NASDAQ:ALTM)
- Schlumberger (NYSE:SLB)
- Sunrun (NASDAQ:RUN)
- NextEra Energy (NYSE:NEE)
- Euronav (NYSE:EURN)
- Golar LNG (NASDAQ:GLNG)
Energy Stocks: DHT Holdings (DHT)
DHT Holdings is a Bermuda-based company that operates a fleet of 27 crude oil tankers. It operates those tankers through management companies located in strategically important bases in Monaco, Singapore, and Oslo. It operates in the VLCC (Very Large Crude Carrier) segment. The VLCC segment includes only 810 such tankers globally.
One of the keys to succeeding in the price-sensitive oil tanker market is operational efficiency. Commodities dependent companies including DHT Holdings have to be able to react quickly to price shifts.
DHT Holdings looks to have done that very well over the past year. The company’s shipping revenues didn’t slacken until after the second quarter of 2020. In that quarter revenues hit $245.9 million but have steadily dropped to $87.0 million in Q1 2021.
The company quickly adjusted to the issues posed by the pandemic. It slashed its dividend from 48 cents in Q2 2020 to 4 cents in Q1 2021. And it reduced the $705 million of debt it began with in 2020 to $381.3 million by year end. As a result the company remained profitable throughout 2020. In fact, its 2019 net income of $73.7 million more than tripled to $266.3 million in 2020.
With demand and oil prices rising, DHT stock may just rise to the $10 high stock price target Wall Street has given it.
Altus Midstream (ALTM)
Altus Midstream gathers, processes, and transports gas and oil from the Permian basin to the Gulf of Mexico. It makes sense then that Altus Midstream does well when the industry in West Texas does well.
A great barometer of that region’s oil industry health is the price of West Texas Intermediate (WTI) crude oil. You may remember back in April 2020 when prices became negative and headlines declared that storage facilities were paying people to come and get their oil. Those were WTI prices. They’ve since recovered with oil demand peaking higher and higher on increased summer driving and general reopening.
With the increase in WTI prices, ALTM stock has also risen. The two prices correlate quite well so Altus Midstream is likely seeing a surge in revenues as you read this.
Wall Street disagrees with my assessment of Altus Midstream but ALTM stock was well over $100 a few years ago. WTI prices might falter and Altus Midstream indeed has a particular niche in the corridor that it serves. There’s a risk here, absolutely. But there is even more upside in being a contrarian when things work in your favor.
Oilfield servicer Schlumberger has had a rocky climb upward year-to-date. It has been volatile but its overall trajectory is upward. As the economy begins to normalize and oil demand rises on multiple catalysts, Wall Street is clearly behind SLB stock.
In fact, SLB stock is the largest holding in the 29-stock portfolio of the iShares U.S. Oil Equipment & Services ETF (NYSEARCA:IEZ), at a 21.53% weight. It also tops the 27-stock holdings of VanEck Vectors Oil Services ETF (NYSEARCA:OIH). In that exchange-traded fund, Schlumberger shares represent 19.16% of the $2.87 billion in assets.
There is reason to believe price appreciation should materialize, bringing returns. And, if Schlumberger raises its dividend back closer to 50 cents, after slashing it to 12.5 cents in Q2 2020, investors will reward it richly.
Much of Schlumberger’s future growth is rooted in its strategic approach and its current success. The company anticipates compound annual growth in excess of 10% in each the near, mid, and long term. The company will focus on its broad market exposure for the next three years. It then believes its digital platform will play greater significance in unlocking new revenue streams and increasing returns. And in the longer term, like most energy companies, Schlumberger sees sustainable energy as a path forward.
Sclumbereger’s free cash flow margin dropped precipitously in 2020 as a result of the pandemic. Energy companies in particular rely on free cash flow to reward investors. So the fact that Schlumberger’s FCF margin fell from 8.2% in 2019 to 6.0% in 2019 was not a strong sign. The company anticipates that its FCF margin will exceed 10% in 2021 meaning returns should rise as well.
Schlumberger is leaning heavily into further cementing its digital leadership in the space moving forward. To that end, on June 29 it announced, along with IBM (NYSE:IBM), the energy sector’s first commercial hybrid cloud enterprise data management solution for the energy sector.
Sunrun is a San Francisco-based residential solar energy systems company. With a general trend toward cleaner energy production, an administration looking to prioritize it, and Wall Street behind it, SUN stock is in a strong position.
Sunrun operates in 22 states across the U.S. as well as Washington D.C. and Puerto Rico. It counts 550,000 customers in states as far north as Wisconsin and New Hampshire.
The growth remaining in solar energy is vast. There are 77 million solar-energy addressable homes in the U.S. currently. Penetration remains very low at a mere 2.4 million homes currently utilizing solar power. The company estimates that by 2030 11 million homes will have solar energy. That means 13% of homes will be solar powered, up from a current 3%.
Customers like Sunrun because the majority of them realize a 5-45% savings in energy costs in the first year. Investors will like RUN stock because of its massive price appreciation in the past year and consensus target prices of more than 50% above current levels.
More importantly though, Sunrun solar systems create a long-term customer relationship with their 20-25-year financing structure. Sunrun has already captured a large portion of the solar residential market and looks set to capitalize on anticipated growth through 2030.
NextEra Energy (NEE)
Rising oil prices are a bit of a double-edged sword. One the one hand, they provide a boon to oil companies boosting their revenues as they pump, process, and transport the oil and gas to meet demand.
On the other hand, rising oil prices also provide the impetus for consumers to consider alternative energy sources. That’s a boon to NextEra Energy, the world’s largest producer of wind and solar energy.
The company encompasses both an electric energy company in Florida Power & Light, and its wind and solar power assets. The company grew its net income from $642 million in 2020 to $720 million in 2021. That led to an increase in EPS from 33 cents to 37 cents in the same period.
The company certainly has a few strong tailwinds in its favor currently. The current administration is focused on fostering clean energy infrastructure and NextEra Energy is planning between $50-55 billion in American infrastructure investment by 2022.
Theoretically that will lead to job creation, which is always important. Practically, it means that prices should continue to remain strong for the foreseeable future.
Euronav stock is relatively inexpensive at less than $10 per share. And the crude oil transportation company is worth considering given the uptick in oil prices on increasing demand. It operates a fleet of 76 vessels of varying size classes.
That uptick in oil demand, combined with many favorable metrics, makes EURN stock a buy with 14 of the 18 analysts that cover it.
Given that Euronav operates in the very traditional shipping industry it should be no surprise that it carries a relatively low price-to-earnings ratio of 10.26. The metric is better than that of two-thirds of Euronav’s competitors. But it is just one of many which indicate that EURN stock has a lot of value.
The company’s operating and net margins are better than 85% of the oil & gas industry. It also boasts strong returns on assets and equity.
All of these factors indicate that real price appreciation should flow from the shares. The company also issues a small dividend which fluctuates in price quite a bit. Although it currently pays 3 cents, EURN stock’s dividend was 47 cents in August 2020 and even higher in June. There certainly seems to be several ways for the shares to return money to investors right now.
Golar LNG (GLNG)
Golar LNG is an owner/operator of liquefied natural gas carriers, floating storage, and regasification units. It might be best to simply note that Wall Street is strongly behind GLNG stock, giving it a nearly unanimous buy rating. Analyst average target prices of $17.83 mean there is plenty of returns to be had at current $13.81 prices.
Aside from Wall Street’s positive sentiment, Golar LNG is pretty interesting based on its operations. Golar operates a fleet of 10 LNG carriers which transport liquefied natural gas stored at extremely low temperatures. Those carriers transport the liquid gas to 3 floating regasification terminals.
Outside of its marine operations, Golar is interesting because natural gas itself is currently attractive, making GLNG stock attractive. Natural gas demand is generally correlated to economic cyclicality. So, as the economy reopens Golar LNG will have increasing opportunities.
On the date of publication, Alex Sirois did not have (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.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.
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