Energy stocks delivered disappointing returns once again in 2019. The average one in the S&P 500 only produced about an 11% total return as measured by the Energy Select SPDR ETF, which is an exchange-traded fund (ETF) that holds 28 large energy stocks. That significantly underperformed the price of crude oil and the S&P 500, which both rallied more than 30% this year.
Several large energy stocks, however, did produce above-average total returns. Here's a look back at the S&P 500's 10 best energy stocks of 2019.
Williams Companies: 14% total return
Shares of natural gas pipeline giant Williams Companies (NYSE:WMB) increased by only about 8% this year. However, thanks to its 6%-plus-yielding dividend, its total return was in the mid-teens. Aside from that payout, one factor that enabled Williams to generate an above-average total return this year has been the growth in its cash flow, which is up double digits thanks to a boost from its expansion projects. While the company doesn't expect to grow as fast next year, it believes its cash flow and dividend will rise by a 5% to 7% annual rate. That could give it the fuel to continue producing double-digit total annual returns in the coming years.
Devon Energy: 16% total return
This year has been a transformational one for Devon Energy (NYSE:DVN). The upstream oil and gas producer sold the rest of its operations in Canada as well as its gas-focused ones in the U.S. to complete its transformation into a low-cost U.S. oil growth company. Devon used the cash from those sales to pay down debt and buy back stock, repurchasing nearly 30% of its outstanding shares in the past couple of years. Meanwhile, it has dropped its oil breakeven level down below $50 a barrel, which sets it up to generate significant free cash flow in the coming years. It could have lots more room to run even if oil prices don't improve much more.
Schlumberger: 17% total return
Oilfield service giant Schlumberger (NYSE:SLB) produced a decent total return this year, despite some challenging market conditions. The onshore oilfield services market has been under pressure because drillers have been cutting their budgets in the wake of all the volatility in oil and gas prices. Schlumberger, however, has a large presence in the offshore and international markets. Those markets have finally started rebounding after a long drought, which helped buoy Schlumberger's results in 2019.
Baker Hughes: 22% total return
Fellow oilfield service giant Baker Hughes (NASDAQ:BKR) also benefited from its diversification this year. One of the company's specialties is working on liquified natural gas projects, which has been a hot market this year as energy companies approved several new projects. Baker Hughes has also been able to distance itself from beleaguered industrial giant General Electric (NYSE:GE), which has been selling off its stake in the company, lifting a weight that had been holding down its stock.
Valero Energy: 30% total return
Valero Energy (NYSE:VLO) produced a strong return in 2019 because of improving conditions in the refining market. One of the catalysts is a new global fuel standard for marine vessels that goes into effect on Jan 1. That rule change is driving demand for higher-margin low-sulfur fuels, which is pushing up prices. Valero has been working to position itself to take advantage of this change, which has it set up to cash in on what could be an even stronger refining market in 2020.
Phillips 66: 33% total return
Phillips 66 (NYSE:PSX) has also benefited from improving conditions in the refining market. The company captured strong fuel margins during the third quarter, which helped it produce better-than-expected earnings. Phillips 66 got an additional boost from its midstream segment thanks to higher pipeline volumes. Those trends should continue in 2020 as the company continues to benefit from the marine fuel rule change as well as the start-up of a major oil pipeline out of the Permian Basin.
Noble Energy: 34% total return
Noble Energy (NASDAQ:NBL) delivered strong results in what was a transitional year. The oil and gas producer's output came in at the high end of its expectations during the third quarter, while costs continued to fall. In addition to that, it reorganized its U.S. midstream business by selling the rest of its logistics assets to its master limited partnership, Noble Midstream. The highlight, however, is that the company started production at its mammoth Leviathan natural gas field offshore Israel at the end of the year. The completion of that $3.6 billion project has Noble Energy on track to produce significantly more cash flow in the coming years. Shares could have lots more room to run.
Kinder Morgan: 44% total return
Pipeline giant Kinder Morgan (NYSE:KMI) finally enjoyed a long-awaited bounce-back year in 2019. That's due in large part to additional steps the company took to improve its financial profile, including completing its exit of Canada. As a result, Kinder Morgan enters 2020 with lots of financial flexibility. That puts it in an excellent position to continue creating value for shareholders by returning more cash through its dividend and buyback program, as well as investing in new expansion projects.
ONEOK: 48% total return
ONEOK's (NYSE:OKE) expansion program continued to pay dividends in 2020. The pipeline company put the finishing touches on a couple of major projects while making progress on several more. As such, it's on track to finish five growth projects by early next year, which should fuel accelerated earnings growth in 2020. ONEOK should have no problem delivering on its goal to increase its high-yielding dividend by 9% to 11% annually through 2021.
Hess: 66% total return
Hess (NYSE:HES) also performed well in what was a transitional year. The oil and gas producer delivered high-end production from its legacy regions, which helped it report better-than-expected quarterly results. However, the highlight of the year is that Hess and its partners finished up construction on the first phase of their Liza project offshore Guyana. That oil field will fuel big-time production and cash flow growth over the next several years, potentially positioning Hess to continue producing strong returns.
Rewarded for what lies ahead
Most of the top energy stocks of 2019 delivered big gains because investors see even better days ahead. Many finished up major projects or business transformations that have them on track to produce significantly more cash flow in 2020. That will give them the money to reward their shareholders through higher dividends and share repurchase programs. Because of that, these stocks have lots of momentum as they head into 2020, which could give them the fuel to continue producing strong total returns in the coming year.