The tailwinds behind energy stocks are greater than the purported headwinds because the demand for oil and gas is so large.
The global under-investment in fossil fuel production over the past 10-plus years has put the industry in a unique position. Although the economics for more oil and gas exploration didn’t always make sense, it’s clear the world needs more energy resources. Solar and wind can’t hope to meet the incessant demand and they have their own significant drawbacks.
So investing in a range of energy companies today that benefit future industry growth can be a key element in elevating your portfolio into the millionaire’s club. The following three energy businesses are excellent candidates for your consideration.
Halliburton (HAL)
Think of oil services giant Halliburton (NYSE:HAL) as a picks-and-shovels provider to miners during the gold rush. It didn’t matter who they sold the tools of the trade to, the sellers still won. That’s Halliburton today. It is a major provider of hydraulic fracturing services in Texas as well as deep drilling projects for offshore operations around the world.
Halliburton CEO Jeff Miller told investors earlier this year, “It’s clear to me that oil and gas is in short supply, and only multiple years of increased investment in both stemming declines and reserve additions will solve short supply. I believe these investments will drive demand for oilfield services for the next several years.”
It’s apparent in the oil services company’s results. First quarter revenue jumped 33% to $5.7 billion while profits soared almost 150% to 72 cents per share.
Halliburton’s stock is also cheap. It trades at 16 times trailing earnings, less than 10 times next year’s estimates, and at a fraction of its projected earnings growth rate. Wall Street expects the energy stock to grow profits at a 33% compounded annual rate for the next five years. Look to Halliburton to be a long-term winner.
Northwest Natural (NWN)
Utilities don’t usually jump to mind when you think of energy sector investing. Yet investors would do well to also consider electric utilities such as Northwest Natural (NYSE:NWN). As its name implies, it provides natural gas utility services to the northwestern states of Oregon and Washington. It also provides water service in Texas and Arizona.
Northwest Natural benefits from its mix of industrial and residential customers. Where the former produce the lion’s share of its volume of its electricity business, the latter provide higher margins.
The utility has been in business in some form since 1859 and has paid a dividend for over 70 years. It has an unbroken streak of raising the payout for 67 consecutive years. And, it will likely make it 68 years when it announces its next dividend payment. That makes the stock a dividend king, or a company that has raised its dividend for 50 or more years.
The dividend currently yields 4.1%. Its payout ratio, or the percentage of its profits that are paid out as dividends, stands at 74%. Typically that’s considered high. A utility, however, can often afford to pay out more of its profits than other businesses because earnings growth tends to be fairly steady.
Northwest Natural’s stock is trading at its lowest level in about eight years and at a price-to-earnings ratio that hasn’t been seen in over a decade. A result of rising input costs due to inflation, margins tend to compress because utilities can’t simply raise prices. They have to go through regulatory approval for rate increases. These cycles come and go, but the overall trend is up.
Northwest Natural is a long term, high return energy stock that can be picked up at a discount today.
Brookfield Renewable Partners (BEP, BEPC)
Although renewable energy does have problems, it is going to be a piece of the energy puzzle in the years to come. Brookfield Renewable Partners (NYSE:BEP, NYSE:BEPC) is one of the best at providing a range of resources.
It offers hydroelectric power, solar and wind energy and energy transition assets. The company sells the power generated by these assets to electric utilities and others under long-term fixed-rate contracts called power purchase agreements. Brookfield has proven it is very adept at acquiring and managing these unique assets.
The problem, if you can call it that, is investors can’t expect high growth from operating infrastructure. They are a fixed cost asset. The value comes from the investment the manager makes into the assets and from its acquisition of additional ones. It just agreed last month to acquire the commercial renewables business from Duke Energy (NYSE:DUK).
The stock is down 15% over the past year, but 15% higher in 2023. It’s one an investor should consider buying in small bites over time rather than jumping into a big position all at once. It’s a long-term growth story and one investors need to be mindful of.
On the date of publication, Rich Duprey held a LONG position in NWN stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
