Energy stocks produced surprisingly lackluster returns in 2019. The average one in the Vanguard Energy ETF -- an exchange-traded fund that holds more than 140 energy stocks -- only gained around 5% for the year. That vastly underperformed crude oil and the S&P 500, which both soared about 30% on the year.
Last year's poor performance, however, could set energy stocks up to outperform in 2020. Many have notable catalysts on the horizon that could give them the fuel to generate strong total returns. Here are the top stocks to buy across each segment of the energy market.
Upstream oil and gas: Devon Energy
Devon Energy (DVN 3.32%) was one of the S&P 500's top-performing energy stocks in 2019. However, its 16% total return significantly underperformed that index and the price of oil. Because of that, the oil and gas producer has significant untapped upside in 2020, given the recent completion of its transformation program.
After selling several high-cost assets, Devon has lowered its oil breakeven level to less than $50 a barrel. Because of that, it's on track to produce more than $675 million in free cash over the next year since crude oil is currently over $60 a barrel. Add that to the money it will receive from a recent asset sale, and Devon can repurchase another 12% of its outstanding shares over the coming year, which could continue pushing its price higher in 2020.
Midstream: Energy Transfer
Leading MLP Energy Transfer (ET 2.02%) lost about 2% of its value in 2019, even though its earnings are on track to grow by about 16%. Because of that slump, the company trades at one of the cheapest valuations in the midstream sector at just eight times earnings. Meanwhile, the decline also pushed its yield down to an eye-popping 9.4%.
With Energy Transfer on track to continue growing earnings at a healthy rate in 2020, it has significant upside potential, especially when factoring in that big-time yield and dirt cheap valuation. If the market starts giving Energy Transfer the credit it deserves, the MLP could produce a more than 20% total return in the coming year.
Refining: Marathon Petroleum
Marathon Petroleum (MPC 2.00%) delivered an underwhelming performance in 2019 as the refining giant's stock only rose about 2% on the year. That was well below the returns of its refining peers, which enjoyed a good year, thanks to improving market conditions.
That underperformance led an activist investor to press Marathon Petroleum to make changes, including spinning off its Speedway gas-station business, which it should complete in 2020. This move, and others it plans to make to reduce costs, when combined with further improvements in the refining market, could send shares of Marathon up nearly 40% in 2020.
Renewable energy: Clearway Energy
Clearway Energy (CWEN 1.29%) (CWEN.A) initially had high expectations for 2019 as the wind and solar power producer expected to boost its high-yielding dividend by another 5% to 8%. However, it got some disappointing news early in the year when a key customer -- California utility PG&E (PCG -1.68%) -- filed for bankruptcy. That move forced Clearway to slash its dividend by 40% to conserve cash. Despite that bad news, Clearway Energy still managed to generate a 22% total return after adding in its now 4%-yielding payout.
One reason its shares rose last year is that Clearway used its improved financial flexibility to continue expanding its portfolio. Because of that, it's on track to grow its cash flow by another 18% in 2020. Add that to the potential for some clarity on the PG&E situation, and Clearway could generate another 20%-plus total return in 2020.
Utility: Duke Energy
Duke Energy (DUK -1.54%) delivered a meager gain in 2019, as shares only rose about 5%. However, after adding in its 4.2%-yielding dividend, Duke's total return approached 10%. Still, that was well below most of its peers, many of which generated significant total returns as yield-seeking investors flocked to the sector after the Federal Reserve reduced interest rates.
Duke's relative underperformance, however, makes it a more attractive option for 2020. The company is on track to grow its earnings by 4% to 6% per year through 2023, which should support similar growth in its dividend. That positions it to produce another double-digit total return in 2020, making it an ideal stock for investors seeking a lower-risk energy option.
Visible upside in the coming year
All five of these energy stocks have the potential to produce market-beating total returns in 2020 because each one has a clear catalyst to propel its stock. Further, aside from Devon Energy, these energy companies have the potential to produce strong returns even if oil prices cool off over the next year. That limited exposure to pricing volatility makes them ideal options for investors who want to energize their portfolios without the risks associated with the ever-changing price of crude oil.