9 Best Energy Stocks to Buy for an Exceptional 2021
Oil and gas companies are on the mend after a dreadful 2020. Here are some of the best energy stocks to buy for a bounceback in 2021.
It has been one crazy year for energy stocks as the global coronavirus pandemic has disrupted supply chains, sapped demand and resulted in extreme volatility for oil and gas prices.
In fact, fears of oversupply and a lack of storage in April briefly drove West Texas Intermediate crude oil futures into negative territory for the first time in history.
But as markets have stabilized into 2020's late innings, oil has bounced back and now sits at roughly $45 a barrel. That's flirting with the highest levels since early March, providing a sign that things are not quite as dire as they were several months ago for the energy sector. And that has analysts excited about the potential for some of the best energy stocks in the space going forward.
As we look to 2021, then, it's important to take stock of which energy-sector stocks are doing well and which ones are not. Some have indeed been hit so hard that they might take time to recover. However, other resilient names have recently added a lot to their share prices, and could be smack-dab in the middle of a rebound.
If you're looking for the best energy stocks as we enter the New Year, here are nine picks in the sector to consider.
Data is as of Dec. 2. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Analyst ratings provided by S&P Global Market Intelligence. Stocks are listed in reverse order of analysts' composite rating.
Williams Cos.
- Industry: Midstream
- Market value: $26.3 billion
- Dividend yield: 7.4%
- Analyst ratings: 14 Strong Buy, 6 Buy, 4 Hold, 0 Sell, 0 Strong Sell
Pipeline operator Williams Cos. (WMB, $21.65) is a stock that offers a relatively stable energy investment with a robust dividend. In fact, with a 7%-plus payout at present, it is among the top 10 dividend payers in the S&P 500 as measured by dividend yield.
Sure, some other energy stocks out there offer up similar or even higher yields. But they aren't as established at the $26 billion Williams Cos., which is listed among the top 500 U.S. stocks.
As a midstream energy company, Williams benefits from a wide moat created by the regulatory oversight of its operations and the huge capital expense it would take for a competitor to enter its markets. Furthermore, WMB negotiates long-term contracts with customers, providing reliability to an already consistent business model that relies on transportation and storage rather than exploration and production.
That's evidenced by the fact that WMB recently reaffirmed its prior 2020 forecasts from before the pandemic despite all the volatility we've seen for the energy markets this year.
Indeed, Stifel analysts recently reiterated their Buy rating and $29 price target for the next 12 months, saying "Williams' business model continues to display its resilience through numerous headwinds in 2020."
That kind of stability makes WMB one of the best energy stocks to buy now for a fruitful 2021.
Phillips 66
- Industry: Refining and marketing
- Market value: $28.1 billion
- Dividend yield: 5.6%
- Analyst ratings: 9 Strong Buy, 11 Buy, 0 Hold, 0 Sell, 0 Strong Sell
With shares roughly half where they were trading to start the year, refinery play Phillips 66 (PSX, $64.43) has certainly seen better days. But if you've followed energy markets long enough, you should know that eventually, fallen giants like this $28 billion refiner get cheap enough that their undeniable value makes them worth an investment anyway on the hopes of a recovery.
Sure, Phillips 66 is hurting. Its operations have posted a $3.4 billion loss across the first nine months of the year compared with $2.3 billion in profits by the same point in 2019.
However, it cannot be overlooked that amid all this chaos, PSX has retained its investment-grade ratings even as other energy stocks are stuck in junk bond territory. What's more, the company's financial team continues to target debt reduction instead of relying too much on debt right now when times are tough. This is an important shift in thinking, since after the spinoff from parent ConocoPhillips in 2012, PSX made several large debt offerings, with some of the proceeds going to share buybacks, which Phillips 66 nixed earlier this year.
This kind of discipline in a moment of crisis will serve Phillips 66 well as it looks to the future. Meanwhile, its size and diversification should serve investors in energy stocks well as we head into 2021.
"Despite a challenging energy market, we believe that a company's balance sheet strength and place on the cost curve are critical, and favor refining and marketing companies that are well positioned to manage a potentially long period of low oil prices," writes Argus Research analyst Bill Selesky (Buy). "We believe that PSX is one of these companies as it benefits from its size, scale, and diversified business portfolio, which includes refining, midstream, chemicals, and marketing and specialty operations."
Diamondback Energy
- Industry: Exploration and production
- Market value: $6.4 billion
- Dividend yield: 3.7%
- Analyst ratings: 20 Strong Buy, 8 Buy, 5 Hold, 0 Sell, 0 Strong Sell
While it was hit hard in early 2020 like most other energy stocks, Diamondback Energy (FANG, $40.52) has come back with a vengeance. FANG shares have shot about 160% higher from their 52-week low in spring. That's thanks in part to rising energy prices, but also because of a well-timed cost-savings plan that has boosted efficiency at the right time.
Consider that FANG's well costs are down 30% compared with 2019 numbers, according to recent comments from CEO Travis Stice. This, alongside a steady improvement in oil and gas pricing, has allowed Diamondback to re-affirm its 2020 guidance. These results, demonstrating that the worst looks behind the company now, helped fuel the stock's rally of more than 50% in November.
"FANG has indicated it will be fairly cautious on capex levels in '21, taking a maintenance-like approach to spending, and anticipates crude oil production levels in the 170,000 (barrels of oil equivalent per day) range in '21 (more or less flat with Q3)," writes CFRA's Stewart Glickman, who rates the stock at Buy. "However, given FANG's cost improvements, we think it can sustain this production with considerably lower capex."
Glickman adds that "FANG has reasonable financial flexibility, with less than $200 million in debt milestones in '21, and then no debt-retirement outlays needed until '24."
FANG stock remains a risky play, but at $6 billion in market capitalization, it is decidedly more mature than some of the small-cap players in the oil patch that have been hit hardest. Furthermore, it remains soundly profitable so it can make it through any short-term disruptions.
Throw in a healthy dividend of nearly 4% as many other energy stocks are slashing distributions, and you have a pretty good case for hanging on to FANG and hoping the current run for the sector continues into the New Year.
ConocoPhillips
- Industry: Exploration and production
- Market value: $42.7 billion
- Dividend yield: 4.3%
- Analyst ratings: 14 Strong Buy, 7 Buy, 2 Hold, 0 Sell, 0 Strong Sell
At more than $40 billion in market value, ConocoPhillips (COP, $39.97) is already one of the largest U.S. energy stocks out there. But its operations are set to swell in 2021 as it acquires Concho Resources (CXO) in an all-stock deal valued at about $10 billion.
Of course, that comes with $3 billion in debt on top, so the all-in price tag ultimately results in a 15% premium over where CXO was trading in October when the deal was announced; however, it's still very attractive because of Concho's overall business that offers low-cost resources via onshore shale oil fields largely in West Texas and New Mexico. For a worldwide energy firm, these domestic assets with lower extraction costs on average are worth paying a premium for.
Besides, a $10 billion deal is not a small opportunity. The combined company expects to realize $500 million in cost savings as soon as 2022. And with only about $15 billion in total debt, COP boasted an overall debt-to-equity ratio of only about 0.35 at the time of the deal; for comparison's sake, many smaller energy firms have more than three times their market value in long-term obligations at present.
COP has a big brand, a strong balance sheet and capable management to make the most of this acquisition as we turn the page on 2020. That could make it one of the best energy stocks to buy for 2021 as we enter a more favorable environment.
Cimarex Energy
- Industry: Exploration and production
- Market value: $3.7 billion
- Dividend yield: 2.4%
- Analyst ratings: 16 Strong Buy, 7 Buy, 2 Hold, 0 Sell, 0 Strong Sell
Denver-based Cimarex Energy (XEC, $36.77) is as an independent oil and gas exploration and production company with nearly 620 million barrels of proven reserves and owned interests in roughly 2,800 productive oil and gas wells.
Being an independent energy company in 2020 hasn't been easy, but XEC's management rose to the challenge with quick and decisive action that has put it in a strong position now that 2021 is right around the corner.
Perhaps the boldest move of all at XEC was a massive production cut in spring that shut down all operations save a single rig! On top of that, Cimarex slashed more than half of its planned capital expenditures to balance the budget – and as a result, there's a good chance it will actually turn a profit this fiscal year now that operations are beginning to normalize.
UBS analyst Lloyd Berne, who has a Buy rating on shares, adds that "we expect XEC to continue looking for opportunities to divest non-core assets."
Warren Buffett's investing advice has become cliché for good reason, and one of the things he places a big priority on is finding companies managed by a smart and capable team. Making hard choices like this proves that XEC knows what it takes to run their business in hard times. And as oil prices move higher, investors can have confidence that management's decision-making skills will result in continued success in the New Year.
Pioneer Natural Resources
- Industry: Exploration and production
- Market value: $16.7 billion
- Dividend yield: 2.2%
- Analyst ratings: 19 Strong Buy, 8 Buy, 2 Hold, 0 Sell, 0 Strong Sell
After the battered energy sector got cheap enough to spark buying activity, we witnessed a spate of mergers and acquisitions among the lower tier of the industry. Pioneer Natural Resources (PXD, $101.53) was among the firms shopping around, reaching an agreement to buy fellow Permian Basin producer Parsley Energy (PE) for $4.5 billion.
If you're wondering how PXD managed to finance that transaction, the answer lies in the fact that it was an all-stock deal – not great for existing shareholders, but it did ensure Pioneer didn't have a new giant debt load hanging over its head. Meanwhile, it can gain efficiencies that come from a merger of this size.
And the fact that Parsley operated primarily in the same region of West Texas, where Pioneer has both expertise and existing staff, sweetens the deal given the potential for significant cost-savings over time.
That deal was a coup for Pioneer shareholders, built on the fact it was large and well-capitalized at a time when stressed and debt-reliant shale plays were looking for a white knight in what is decidedly a buyer's market. On top of that acquisition, PXD also boosted its dividend by 25% at the start of the year as further evidence of its strong balance sheet.
While some smaller energy firms are clearly hurting, Pioneer hasn't wasted the crisis and continues to consolidate market share as it looks to the future.
Enterprise Products Partners LP
- Industry: Midstream
- Market value: $43.9 billion
- Distribution yield: 8.9%*
- Analyst ratings: 15 Strong Buy, 9 Buy, 0 Hold, 0 Sell, 0 Strong Sell
Enterprise Products Partners LP (EPD, $20.10), a master limited partnership (MLP), is more of a long-term income investment than some of other tactical trades on this list.
EPD is a "midstream" energy giant focused on infrastructure including pipelines, storage facilities and processing terminals. In other words, it has somewhat less risk to energy prices than E&P plays, given that it simply passes the oil and gas from production companies along to refineries and end users. (Though it still needs some level of baseline demand for the oil and gas products it transports and stores.)
Admittedly, there's not a lot of growth here. But a massive distribution yield of nearly 9% at present gives investors plenty of reasons to stick with EPD for the long-haul. Furthermore, the big cutbacks we saw across the energy sector in early 2020 might add up to a scenario where drilling picks up in the latter part of the year and more fossil fuels are passed through Enterprise terminals – boosting revenue significantly as a result.
But considering Enterprise Products Partners posted earnings per share of $2.09 in 2019 and is targeting a tiny drawback to its projected earnings of $2.07 in fiscal 2020. Few names in the sector that are posting effectively flat profits year-over-year.
Even if it's just for the relative stability and income this energy firm offers, investors should view EPD as one of the best energy stocks for 2021 if only for the relative stability and income this energy firm offers. But price upside is surely on the table, too.
* Distributions are similar to dividends but are treated as tax-deferred returns of capital and require different paperwork come tax time.
Golar LNG Limited
- Industry: Midstream
- Market value: $916.9 million
- Dividend yield: N/A
- Analyst ratings: 11 Strong Buy, 2 Buy, 0 Hold, 0 Sell, 0 Strong Sell
Energy shipping plays can be notoriously volatile, but investors in Golar LNG Limited (GLNG, $9.38) seem to be on the right side of that volatility now.
Golar is a vessel operator with 12 carriers in its fleet; however, it is closely tied to broader energy shipping trends as it operates floating liquefaction vessels that compress the gas for transportation.
This is an interesting segment of the energy sector to be involved in. The United States is the world's largest producer of natural gas, and this fossil fuel remains in high demand as a "bridge" energy source – the worldwide economy is moving away from dirtier fuels like coal, sure, but we have a long way to go before wind farms and solar panels are plentiful enough to do away with oil and gas altogether.
Golar is currently operating at a loss but is poised for a recovery (and a return to profits) in 2021. The stock also took a very recent hit amid a dilutive equity offering that Stifel analysts call "destructive to long-term upside potential."
But there's a flip side to that coin, say the analysts, which rate the stock at Buy: "(It) should resolve near-term liquidity needs and allow for a more flexible timeline. The company still needs to execute on a number of fronts, but we believe this should enable investors to focus on the long-term opportunities and less on the near-term risks."
And in the long term, GLNG is looking beyond natural gas as it has recently entered into a high-tech collaboration agreement with Black & Veatch in the field of floating ammonia production, carbon capture and hydrogen technologies. This will ensure the energy stock remains relevant as part of a sustainable global economy in the long-term.
Northern Oil & Gas
- Industry: Exploration and production
- Market value: $315.5 million
- Dividend yield: N/A
- Analyst ratings: 7 Strong Buy, 1 Buy, 0 Hold, 0 Sell, 0 Strong Sell
Minnesota-based Northern Oil & Gas (NOG, $6.88) is an interesting energy stock because it owns pieces of oil and natural gas properties but isn't directly involved in their operations. The roughly $315 million company primarily holds interests in the Bakken and Three Forks shale fields across North Dakota and Montana, with working interests in around 7,000 producing wells.
While not particularly large, it's worth noting that NOG has somehow managed to remain profitable even as many similar firms have been brutalized by the volatility in energy prices this year. Yes, revenues plunged by about 80% in Q3, but the fact that Northern Oil & Gas managed to still avoid operating at a loss is a testament to how well-managed this operation is.
Looking forward, Q3 earnings also showed production had ramped up by more than 20%, and forward guidance continues to look rosy as NOG looks to turn a corner and enter 2021 on stronger footing.
Thanks in part to these strong results along with steadily improving crude oil prices, shares skyrocketed almost 70% in November and remain well below the $10 price target that Wells Fargo analysts recently put on shares.
And as a unanimously bullish recommendation set implies, the pros appear to view Northern Oil & Gas as one of the best oil stocks to buy for 2021.
