Farran Powell
Farran Powell
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Updated 9:50 a.m. UTC March 5, 2024
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The energy sector has long been a staple in investment portfolios, as it provides essential services that power our everyday lives.
The sector’s historically cheap valuation in the , energy-related geopolitical risk, and discipline on the part of both U.S. and non-U.S. producers add to the relative attractiveness of the sector, especially given the S&P 500’s recent underperformance.
In screening for the best energy stocks to buy in 2024, we included a list of traditional and renewable energy stocks that are more than $2 billion in market capitalization with high marks for profitability and consensus “buy” ratings among Wall Street analysts.
*Market data cited is as of Jan. 31.
Best energy stocks
- BP (BP)
- Halliburton Co. (HAL)
- Cenovus Energy (CVE)
- NRG Energy (NRG)
- APA Corp. (APA)
BP (BP)
Market cap
YTD performance
What you should know
BP is a British integrated crude oil and natural gas company.
Not only is BP extremely profitable in the currency environment, but its stock is attractively valued and it has an aggressive capital return program that provides steady dividend income for investors and supports the stock price.
In the third quarter, BP reported roughly $5 billion in profit and $8.7 billion in operating cash flow. BP announced a $1.5 billion share buyback and reduced its debt load to $22.3 billion in the quarter. BP management has also consistently demonstrated its commitment to maintaining its attractive 4.7% dividend.
In addition to its profitable core oil and gas business, BP is transitioning to a cleaner future. It has invested heavily in “resilient hydrocarbons,” projects that produce oil and gas with the lowest possible carbon emissions.
Pros and cons
Pros
- The stock’s 4.75% dividend yield is more than double the S&P 500 average.
- Aggressively investing in renewable energy and resilient hydrocarbon projects.
- A resolution to the Russia-Ukraine conflict could unlock value in BP’s Rosneft stake.
Cons
- Lackluster oil production growth may put BP at a disadvantage to peers over the next decade.
- BP’s brand was severely damaged by the Deepwater Horizon oil spill in 2010.
- If BP sells its Rosneft stake before the conflict in Ukraine is resolved, it may not get paid its full value.
More details
Halliburton Co. (HAL)
Market cap
What you should know
Halliburton Co. is an American multinational corporation and one of the world’s largest oil field services companies.
The company provides various services and products to the energy industry, including drilling, evaluation, completion, production, and intervention services.
Halliburton operates in approximately 70 countries and serves various sectors, such as oil and gas, coalbed methane, and geothermal. The company grew its revenue last year by nearly 33% to $20.3 billion and has since increased its dividend to a 1.8% yield.
Pros and cons
Pros
- Global presence and diversified client base across the energy industry.
- Wide range of services and products catering to various sectors.
- Strong focus on research, development, and innovation to improve operational efficiency.
Cons
- Vulnerability to fluctuations in commodity prices.
- Intense competition from other oil field service providers.
- Challenging transitioning to renewable energy due to its core focus on traditional energy sectors.
More details
Cenovus Energy (CVE)
Market cap
YTD performance
What you should know
Cenovus Energy Inc. is a Canadian integrated oil and natural gas company with operations in Canada, the U.S. and the Asia-Pacific region. The company’s operations include oil sands projects, natural gas production and conventional oil production.
Cenovus is committed to advancing environmental, social and governance performance and has set targets for reducing greenhouse gas emissions and improving energy efficiency. If you’re looking for a company with a framework for delivering consistent dividends, CVE targets returning 50% of free funds flow to shareholders. The company has also returned more than $3.6 billion in value to investors since November 2021 via its share buyback program.
Pros and cons
Pros
- Integrated operations in oil sands, natural gas, and conventional oil production.
- Strong focus on ESG performance and commitment to reducing greenhouse gas emissions.
- Stable production base with significant growth potential.
Cons
- Exposure to fluctuations in oil and gas prices.
- Operational risks associated with oil sands extraction and production.
- Challenging transitioning to renewable energy sources due to its core focus on traditional energy.
More details
NRG Energy (NRG)
Market cap
YTD performance
What you should know
NRG Energy is a wholesale power company that owns and operates power generation facilities. NRG has more than 7.5 million home customers and 13 gigawatts of power capacity.
At its investor day event in June 2023, NRG projected free cash flow before growth will increase from 15% to 20% annually through 2027. After deleveraging, the company estimates it will generate $8.3 billion in cumulative excess cash and return $6.9 billion to shareholders via dividends and buybacks during that period.
The company recently raised its dividend by 8% and said it is on track to reduce its debt by $500 million in 2024.
Pros and cons
Pros
- NRG’s restructuring from 2017 to 2020 streamlined the business and produced excess cash used for strategic acquisitions and capital returns.
- Utilities have stable businesses and high earnings visibility.
- Texas has a high electricity demand growth rate outlook for the next decade.
Cons
- Environmental regulations and renewable energy initiatives could reduce the profitability of NRG’s fossil-fuel power plants.
- The retail energy supply business is highly competitive and has thin margins.
- Restructuring and acquisitions have made financial numbers inconsistent and difficult to interpret at times.
More details
APA Corp. (APA)
Market cap
YTD performance
What you should know
APA is an oil and gas exploration and production company that specializes in natural gas, crude oil and natural gas liquids production. The company primarily operates on land in the U.S., Egypt and the U.K. and offshore in Suriname and the Dominican Republic.
In the third quarter of 2023, APA reported 412,000 barrels of oil equivalent (BOE) per day of production and a 16% year-over-year increase in U.S. oil production volumes. The company also generated $764 million in net cash from operating activities and $307 million in free cash flow during the quarter. Through the first three quarters of 2023, APA returned 65% of its free cash flow to shareholders, repurchasing 5.5 million shares of stock. The company also pays a 2.8% dividend.
Pros and cons
Pros
- Production-sharing contract with the Egyptian government increases financial visibility and locks in a lucrative long-term growth opportunity.
- Attractive drilling opportunities in the high-growth, low-cost Permian basin.
- Recent discoveries in Suriname could double APA’s total production in the next decade.
Cons
- Operations in Egypt expose APA to geopolitical risk in the Middle East.
- Alpine High investment in the Delaware Basin may not pay off.
- Expectations for Suriname development are high and may already be priced into APA shares.
More details
Compare the best energy stocks to buy
Methodology
The best energy stocks included above all trade on a major U.S. stock exchange and meet the following criteria:
- An Altimeter overall grade of A or B. The overall grade considers profitability, earning stability, valuation and earning expectations. Grades of B or higher for both are stocks ranked in the top quarter of nearly 5,000 stocks in Altimeter’s stock database, which indicates that these companies have strong valuations with the ability to improve returns.
- A market capitalization of at least $1 billion. Energy is a capital-intensive industry, and smaller companies are often in a start-up stage with a particularly volatile outlook. Companies with a larger established capital base are more likely to be safer investments.
- A consensus analyst rating of a “buy” rating. Some stocks have a consensus analyst rating of buy or even better. This means analysts covering the stock may have a more optimistic outlook on the company’s future performance. A stock with a rating of buy or higher could be considered less risky, and, therefore, more likely to be included in the list.
Why other stocks didn’t make the cut
The methodology requires stocks to be listed on a major U.S. stock exchange. Companies not listed on a major exchange may not meet the same regulatory requirements and can have lower liquidity, making them riskier investments and not eligible for inclusion. Other energy stocks not included in the list were not included because of the following reasons:
- Altimeter overall grade below A or B: Some stocks may not have achieved an overall grade of A or B, which takes into account profitability, earnings stability, valuation and earnings expectations. A stock with a lower grade may indicate a weaker financial position, lesser stability or less attractive valuations, making it less appealing for inclusion.
- Market capitalization below $2 billion: Some energy stocks might have a market capitalization of less than $2 billion. These smaller companies can be in the startup stage or have a more volatile outlook. Companies with a larger established capital base are generally considered safer investments, and smaller companies might not meet the criteria for inclusion in the list.
- Consensus analyst rating below a “buy” rating: Some stocks may not have a consensus analyst rating of buy. This means that analysts covering the stock may have a more cautious outlook on the company’s future performance. A stock with a rating below buy could be considered riskier and therefore, not included in the list.
Advantages of investing in energy stocks
Global energy demand will continue to grow in the long term as emerging markets like India and China become more developed. Because many investors anticipate the energy sector will fully transition to renewable sources over time, the most successful and profitable legacy fossil fuel energy stocks are trading at attractive valuations.
Not only are top legacy oil and gas stocks extremely profitable in the current climate of elevated energy prices, but many are also using a portion of those profits to invest in alternative energy or net-zero emissions initiatives, potentially preparing them to transition their businesses over time seamlessly.
In the meantime, energy sector stocks pay attractive dividend yields that reward investors for their patience.
Risks of investing in energy stocks
The energy market is cyclical, so energy sector investors must always be prepared for a sharp drop in oil and gas prices that may impact a company's profitability. In addition, oil and gas demand declines during economic downturns, so an economic slowdown can be a potential stumbling block for the energy sector.
Funds and institutional investors beholden to environmental, social and governance principles may be unwilling or unable to invest in certain energy sector stocks. Energy companies worldwide will likely also face increasingly harsh regulatory crackdowns on their businesses by environmentalist organizations and politicians that could adversely impact operations and profitability.
Final verdict
Embarking on the energy stock investment journey may appear daunting, especially for newcomers to the financial world. Still, it has the potential to yield impressive long-term returns for those willing to embrace the inherent risks.
Incorporating a diverse mix of conventional and renewable energy companies in your portfolio caters to investors with different risk profiles. It helps mitigate overall risk by avoiding an all-in approach on a single stock.
Navigating the complex landscape of energy stocks and searching for exceptional investment prospects can be demanding. Yet the potential advantages make it a gratifying pursuit for those who successfully uncover the hidden gems.
Frequently asked questions (FAQs)
Energy stocks may not be completely safe during a recession, as energy demand can decrease due to reduced industrial activity and consumer spending.
But given the essential nature of energy in daily life, they may be more resilient than other sectors.
The sector is currently undergoing a massive transformation, with renewable energy sources increasingly taking center stage in response to global concerns about climate change and sustainability. Investing in renewable energy can be a smart choice, as the sector is poised for long-term growth due to an increasing global focus on sustainability and climate change.
That said, you should still carefully evaluate individual companies and projects, as the industry can be affected by regulatory changes, technology advancements, and market competition.
Yes, global energy demand will continue to rise in the next several decades, creating plenty of financial opportunities for the companies supplying that energy.
Investors concerned about the global energy market transitioning to renewable energy should take a diversified approach to the sector, establishing positions in both renewable energy technology companies and legacy energy companies investing in renewable and net-zero emissions initiatives.
The energy sector took a breather in 2023. But based on consensus analyst price targets, the energy sector still has more upside potential over the next 12 months than any other market sector.
Analysts see the energy sector moving forward and project 21.6% average upside from energy stocks.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
Blueprint has an advertiser disclosure policy. The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.
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Wayne Duggan is a regular contributor for Forbes Advisor and U.S. News and World Report and has been a staff writer for Benzinga since 2014. He is an expert in the psychological challenges of investing and frequently reports on breaking market news and analyst commentary related to popular stocks. Some of his prior work includes contributing news and analysis to Seeking Alpha, InvestorPlace.com, Motley Fool, and the Lightspeed Active Trading blog. He’s the author of the book "Beating Wall Street With Common Sense," which focuses on practical investing strategies to outperform the stock market. He resides in Biloxi, Mississippi
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Farran Powell is the lead editor of investing at USA TODAY Blueprint. She was previously the assistant managing editor of investing at U.S. News and World Report. Her work has appeared in numerous publications including TheStreet, Mansion Global, CNN, CNN Money, DNAInfo, Yahoo! Finance, MSN Money and the New York Daily News. She holds a BSc from the London School of Economics and an MA from the University of Texas at Austin. You can follow her on Twitter at @farranpowell.
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