Global demand for energy continues to climb higher, up 2.1% in 2017, according to the International Energy Agency. This growth in energy, in the form of fuels and electricity, is expected to increase 25% by 2040, according to the U.S. Energy Information Administration (EIA).

With energy demand on the rise, stocks of energy companies have the potential to expand their value over the long term. However, even though demand for overall energy is on the rise, not all energy stocks will follow suit. Energy prices are volatile in the short term, meaning they fluctuate wildly and are not steady.

The price of crude oil, a crucial transportation fuel, rose for much of 2018 before unexpectedly plunging toward the end of the year. Meanwhile, natural gas prices in the U.S. surged toward the end of 2018 as temperatures cooled down, which drove up demand for this key heating fuel. This kind of unpredictable volatility is why investors need to fully understand the energy sector before they can choose the energy companies best positioned to operate a solid business during times when energy fetches lower prices.

A hand holding a lightbulb with icons of the energy industry such as an oil pump, solar panel, and wind turbine around it.

Image source: Getty Images.

What is an energy stock?

An energy stock refers to any publicly traded company operating in the energy sector, which falls into two broad categories: fuels and electricity. This includes companies that produce, transport, or process fuels such as oil, natural gas, coal, and gasoline, as well as those that generate or distribute electricity. Investors should develop a firm grasp of the landscape in which these companies operate and profit, as these fundamentals have a significant impact on stock prices.

On the fuels side, companies that produce energy commodities like oil and gas tend to deliver a gusher of profits when prices are high but can lose money when prices tumble. Because of that, investors in oil and gas stocks need to be comfortable with volatility -- meaning you won't sell your energy stocks when prices plummet and can maintain a long-term buy-and-hold attitude. Meanwhile, midstream oil and gas companies, which operate pipelines, processing plants, and storage-and-export terminals, tend to generate steadier cash flow since most sign long-term, fee-based contracts with companies that need to ship oil and gas to end users like refineries and petrochemical plants, making them better suited for less risk-tolerant investors.

Consumers of fuel, on the other hand, tend to make more money when energy prices fall because they must first purchase the fuel. In addition to those companies directly involved in handling fuel, several others assist in the process by providing services, equipment, or other supplies needed to produce fuels. This gives investors many ways to invest in this part of the energy industry tangentially if they can't stomach volatile oil stocks.

Meanwhile, there also are several types of companies on the electricity side. Some entities own power-generating facilities that sell electricity to end users either under a fixed-price contract or at current market rates. "Pole and wire" companies, on the other hand, operate transmission lines that move power from generation facilities to customers and typically generate steady income as electricity passes through their systems.

Finally, utilities usually own power plants and transmission lines to operate local distribution networks that supply power to homes and businesses. Some utilities also distribute natural gas to customers and operate distribution pipelines, as well as long-haul pipelines that move natural gas from supply regions to their distribution systems and gas-fired power plants. Finally, companies that build electricity-generation equipment, such as solar panels and wind turbines, also qualify as energy stocks. 

What is the outlook for the energy market in 2019?

In mid-November of 2018, the EIA forecast that the global oil price benchmark, known as Brent crude oil, would average $72 a barrel in 2019, while the U.S. price, referred to as WTI in the markets, would sell at a $7-a-barrel discount to Brent, held down by the continued lack of infrastructure. This forecast implies that crude prices would be slightly less than they were in 2018, driven in part by the EIA's view that U.S. oil supplies will rise another 1.2 million barrels per day (BPD) in 2019 to a record 12.1 million BPD, which could cause supplies to outpace demand for at least the first part of the year.

The EIA also anticipates that an abundance of natural gas production in the U.S. will put some downward pressure on prices in 2019, which it predicts will average under $3 per million British thermal units (MMBtu), down from slightly more than $3 per MMBtu in 2018. In the EIA's view, America's gas production will rise to 89.6 billion cubic feet per day, which also would set a record for the country.

Driving that increase will be higher natural gas production from both newly drilled oil wells and those focused on gas, especially in the gas-rich Marcellus Shale across parts of Pennsylvania and West Virginia. Absorbing much of that increase in supply will be recently built liquified natural gas (LNG) export terminals that will ship America's abundant supplies overseas.

Aside from rising exports, gas will remain a vital fuel for generating electricity in the U.S. The EIA sees its share of the market increasing from 35% in 2018 to 36% in 2019, while coal's share will fall from 28% to 26%, with wind and solar joining gas in stealing coal's market share.

This forecast suggests that 2019 could be a good year for energy stocks, provided they can handle those market conditions. Low-cost oil producers, for example, could thrive if oil is in the mid-$60s, as could low-cost gas producers. Coal companies, on the other hand, likely will continue to struggle, while renewables could shine.

Silhouette of an offshore oil rig at sunset.

Image source: Getty Images.

The top energy stocks for 2019

Using that forecast as a guide and keeping risk levels in mind, I've chosen five stocks from several subsectors of the energy industry that are well-positioned to potentially generate market-beating returns in the coming year. Many of these stocks also offer attractive dividend yields, which is the money paid back to investors just for holding the stock, with the yield expressed as a percentage of a current share price.

Energy Stock

 Ticker Symbol

 Dividend Yield

Energy Sector Focus

Occidental Petroleum

 (NYSE:OXY)

4.4%

Oil

Enterprise Products Partners

 (NYSE:EPD)

6.5%

Midstream

Antero Resources

 (NYSE:AR)

0%

Natural gas

TerraForm Power

 (NASDAQ:TERP)

6.6%

Renewable energy

Brookfield Infrastructure Partners

 (NYSE:BIP)

4.9%

Utilities and midstream

Data source: Google Finance. Dividend yield as of November 29, 2018.

Here's a closer look at each of these energy stocks and why they look like the top options for investors in the coming year.

Top oil stock: Occidental Petroleum

Occidental Petroleum is a Houston-based company that's been in the oil business for decades and has been led by CEO Vicki Hollub since 2016. Under her direction, Occidental spent much of 2017 and 2018 working on improving its profitability so that it could produce enough cash flow at a low oil price of $40 a barrel to sustain its operations -- which means it can invest in the new wells needed to maintain its production level, as well as pay its high-yielding dividend.

After lots of work, the company completed its plan during the second quarter of 2018. In fact, thanks to higher oil prices throughout much of 2018, as well as the sale of some of its midstream assets, the company produced $5 billion of additional cash during the year.

The company earmarked $1.1 billion of that money for drilling more wells and planned to use $2 billion to buy back its stock. That sets up Occidental Petroleum to grow its production more than 10% by the end of 2019 while returning over $5 billion in cash to investors via dividends and its share repurchase program -- assuming oil averages around $50 a barrel. Meanwhile, if crude oil prices are higher in 2019, the company could grow at a faster pace while returning more money to investors.

Aside from being set up for a strong year in 2019, Occidental Petroleum is well-positioned to continue creating value for investors in the future. The company estimates that it can grow its production by 5% to 8% per year through 2022 on the cash flow it can produce on $50 oil while returning significant cash to shareholders above its dividend if oil is higher than that level.

Occidental's ability to deliver strong production growth while returning lots of money to investors makes it an ideal oil stock for 2019. Not only will it be just fine if oil prices fall but it can thrive if they're high. That ability to do well in any market environment makes it a solid option for risk-averse energy investors. 

Top midstream stock: Enterprise Products Partners

Enterprise Products Partners operates one of the largest integrated energy midstream networks in the country. These assets provide a key bridge to move hydrocarbons from wells to end users like petrochemical facilities, refineries, and power plants. Enterprise typically gets paid a fee as it transports those hydrocarbons along its system, which enables it to generate very stable cash flow that it uses to pay a high-yielding dividend and build additional midstream assets.

The company constructed $6.1 billion of expansion projects during 2017 and 2018, which should grow its cash flow to the point where it can support its high-yielding dividend with enough excess to internally finance its $3.5 billion growth-focused capital budget for 2019. Thus, the company expects to be in the position where it can increase its payout at a faster rate, initiate a buyback program, or invest in more high-return growth projects.

The company already had $6 billion of expansions lined up for 2019 and 2020, which sets it up to grow cash flow at a healthy pace in the coming years. Meanwhile, it has several more projects in development that could enable it to continue growing at a fast pace for years to come.

With Enterprise Products Partners likely returning more cash to investors in 2019, it's an ideal stock for those seeking a low-risk income stream.

Top natural gas stock: Antero Resources

As noted earlier, natural gas prices could be under a bit of pressure in 2019 due to booming production growth. However, that's not a worry for natural gas producer Antero Resources, since it has contracts to sell 100% of the gas it expects to produce in 2019 at $3.50 per MMBtu, which has largely taken commodity-price risk out of the equation.

Because of that, the Denver-based company has high confidence in its growth plan, which would see it expand production per debt-adjusted share -- a metric that takes into account changes in both the share count and debt balance -- at a 23% compound annual rate from 2018 through 2020, while generating significant free cash flow.

Antero expects to use the bulk of that money to buy back its stock. The natural gas producer had already announced a $600 million share-repurchase plan in October of 2018 that it will partially fund by streamlining its midstream entities. Meanwhile, it could repurchase $1.3 billion of its stock by early 2020 given the free cash flow it expects to produce in 2019.

Looking further ahead, the company could return as much as $3.5 billion in cash to investors by 2022 if commodity prices cooperate. This represented 70% of Antero's market cap in late-November of 2018, given how cheap shares traded after slumping for much of that year. That big-time buyback has the potential to lift Antero's shares in 2019, which makes it a great stock idea for both growth and value investors.

A road leading up to a row of wind turbines with the sun setting in the distance.

Image source: Getty Images.

Top renewable energy stock: TerraForm Power

TerraForm Power operates facilities that generate wind and solar power across North and South America, as well as Europe. The company sells about 96% of its power under long-term contracts or through a regulated pricing framework that locks in predictable rates, generating very stable cash flow.

TerraForm Power aims to return 80% to 85% of that money to investors via its high-yielding dividend. The company intends to reinvest what remains on high-return expansion initiatives that will increase its cash flow. Those growth-focused investments when combined with the company's focus on generating more cash flow from its existing assets by cutting costs has TerraForm on pace to grow its cash flow per share by a 5% to 8% annual rate through 2022, which should support a similar growth rate in its dividend.

In addition to the company's embedded organic growth, Terraform Power sees significant potential to acquire renewable power-generating assets in the future, which could accelerate its dividend growth rate. The company completed one notable deal in 2018, buying a portfolio of wind and solar assets in Spain and Portugal for $1.2 billion, which enabled it to increase its dividend by an additional 6% above its initial plan for 2018.

The company also sees this deal serving as a springboard to consolidate renewable power assets, particularly in Spain, where TerraForm believes it can buy them at attractive prices and wring out costs by integrating them into its European platform. Meanwhile, the company also is looking at potentially making a move into Mexico in 2019 while continuing to invest in expanding its platform in the U.S.

With a high-yield dividend that should grow at a mid- to upper-single-digit rate in 2019, TerraForm Energy is a great option for income seekers, especially investors who want to put their money behind energy companies that don't contribute to worsening climate change.

Top utility stock: Brookfield Infrastructure Partners

Brookfield Infrastructure Partners is one of the largest operators of infrastructure assets in the world. Most of its money comes from utilities, but it also has transportation assets like ports, toll roads, and railroads; data infrastructure assets such as communications towers and data centers; and energy assets like natural gas pipelines and processing plants.

Brookfield's utility businesses distribute electricity and natural gas to roughly 6.5 million customers in Europe and South America. The company's utilities segment also includes a natural gas pipeline system in Brazil and electricity transmission lines in North and South America. Finally, the company also operates a regulated coal export terminal in Australia.

What makes Brookfield's utility businesses stand out is that it generates steady cash flow. The company mainly gets paid fees to distribute electricity and gas to customers, with more than 80% of this segment's cash flow supported by long-term contracts. Meanwhile, Brookfield expects its utilities earnings to grow by a mid-single-digit annual rate through 2022, driven by the roughly $1 billion of expansion projects it has under way, which includes building out new electricity transmission lines in Brazil.

Brookfield can accelerate that growth by acquiring additional utility assets, which is what it did in early 2018 when it bought the second-largest gas distribution utility in Colombia. That transaction is one of six the company had under contract in late 2018, which positions Brookfield Infrastructure to grow earnings by 20% in 2019.

Further, those new additions should give the company the fuel to expand its profits by 6% to 9% per share each year through at least 2022, which would support 5% to 9% annual growth in the company's high-yielding dividend over that same time frame. That expectation of fast-paced growth in 2019, along with ample future upside, could give Brookfield Infrastructure the fuel to generate market-beating returns in the coming years, which makes it the top utility stock, especially for income-focused investors.

Energy ETFs for 2019

Because the energy sector can be a volatile one for investors, picking winning stocks can prove to be challenging as company-specific issues, such as misallocating cash on poorly timed acquisitions or expansion projects, can impact shareholder returns. Because of that, investors might want to consider taking a broader approach to investing in energy in 2019. One way to do that is by investing in exchange-traded funds, which are stock-like investments that hold shares in several companies.

One option to consider is the Vanguard Energy ETF, which held more than 140 energy stocks at the end of 2018. This ETF invests across much of the energy sector, including holding oil and gas producers like Occidental Petroleum and Antero Resources, as well as several midstream companies. This investment offers investors an easy way to gain exposure to the entire sector while helping mitigate the risks of picking the wrong stock. 

Meanwhile, investors who want to focus on clean energy might want to consider the iShares Global Clean Energy ETF, which holds the stocks of 30 companies focused on renewables. Among its top holdings are wind turbine and solar panel manufacturers, as well as companies like TerraForm Power that operate renewable power-generating assets. By investing in dozens of clean energy companies, this ETF enables investors to avoid picking the wrong stock, which could cause them to miss out on this massive opportunity.

Energy stocks for no matter what 2019 brings

While the EIA anticipates that 2019 will be a solid year for energy prices, that's no sure thing. That's why investors should focus their attention on energy stocks that can thrive if prices take a plunge. Producers Occidental Petroleum and Antero Resources fit that bill since the former can run its business on $40 oil while the later has locked in all its gas production at a higher price than the EIA's forecast.

Meanwhile, companies without direct exposure to energy-price volatility, like midstream companies, renewable power generators, and utilities, are also good options for the coming year. Not only are they less risky, but they generate excellent income streams, which could help cushion the blow if 2019 is a down year for the energy market.

Matthew DiLallo owns shares of Brookfield Infrastructure Partners, Enterprise Products Partners, and TerraForm Power. The Motley Fool recommends Brookfield Infrastructure Partners and Enterprise Products Partners. The Motley Fool has a disclosure policy.