Oil prices have rallied more than 40% this year. Fueling that surge has been improving demand from the reopening of the economy and constrained supplies as OPEC and other producers hold back output. Those strong market fundamentals have fueled a huge rally in oil stocks. The average energy stock in the S&P 500 is up more than 45% this year, compared to a roughly 12% gain for the broad market index.
Oil stocks could have more fuel to continue their market-crushing performance since the industry is still in the early days of its recovery. Three top options that our energy contributors believe have more room to rally are TotalEnergies (TOT +0.00%), EOG Resources (EOG +0.65%), and Energy Transfer (ET +1.02%).
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New name, same great company
Reuben Gregg Brewer (TotalEnergies): If you look at this year's energy sector gains, France's TotalEnergies, formally known as Total, isn't keeping pace with peers like Exxon, Chevron, and BP. However, if you push back a little and look at the trailing year, those other companies have simply caught up with TotalEnergies' earlier strong performance. What's really going on?
The answer is actually found in the company's name change to TotalEnergies. Basically, TotalEnergies has been more aggressive than some of its peers in addressing the global shift toward cleaner energy alternatives. But unlike BP and Shell, it has undertaken this shift while also remaining committed to maintaining its dividend, and thus its robust 6.4% dividend yield. That yield is at the high end of the integrated peer group, which should entice dividend-focused investors. And with rising oil prices, there's little risk to the payout today.
TOT Dividend Yield data by YCharts
Meanwhile, TotalEnergies has managed to stay out of the crosshairs of environmental groups and activist shareholders. Indeed, Exxon has to deal with new board members with potentially agenda-changing mandates and Shell just lost a lawsuit that could end up, for better or worse, accelerating its clean energy initiative. TotalEnergies is happily flying under the radar while paying a fat dividend and adjusting its business in line with the world's clean energy push. All in, that's a pretty desirable combination.
A potential gusher of dividends ahead
Matt DiLallo (EOG Resources): EOG Resources is one of the many oil companies cashing in on higher oil prices. The company produced a record $1.1 billion of free cash flow during the first quarter, fueled by a 24% increase in its average realized oil price to $58.07 per barrel. It would have generated even more cash if its production hadn't slipped 3% due to winter storms in Texas during the quarter. With that headwind past, and oil prices approaching $70 a barrel, EOG could produce an even bigger free cash flow gusher in the coming quarters.
The company intends to return a significant portion of that money to shareholders. It already declared a $1 per share special dividend in the first quarter to send some of that cash to investors. Add in its regular quarterly dividend of $0.4125 per share, and EOG is on pace to hand investors $1.5 billion this year.
However, it could send even more money back this year. CEO Bill Thomas told investors on its first-quarter conference call that EOG "has a lot of cash coming." He noted the company could use those funds to increase its regular dividend, reduce debt, pay additional special dividends, and make bolt-on acquisitions. While the company doesn't intend to make special dividends a regular occurrence like the variable dividend programs of some peers, it could occasionally make supplemental payments to investors. When combined with the upside of its high-return drilling program, those additional payouts could give EOG the fuel to produce high-octane total returns in the coming years if oil prices remain elevated.
This high-yield stock looks primed to boost shareholder returns
Neha Chamaria (Energy Transfer): Energy Transfer shares may have rallied 25% in the past one month, but they may not be done just yet given how much rosier the company's prospects look, thanks to a windfall gain from the Texas winter storm. As sweeping power cuts hit natural gas supply during the storm, Energy Transfer's preparedness ensured its pipelines and processing plants could operate and plug the gaping supply hole by selling gas for sky-high prices.
The result? Despite lower crude transportation volumes, Energy Transfer's Q1 net income hit a record $3.29 billion and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) shot up to $5.04 billion from $2.64 billion in the year-ago period. The company prudently used the extra cash to pare down debt worth nearly $3.7 billion in the quarter, which means it could more quickly hit its debt-to-EBITDA target of 4 to 4.5 times. That's great news for shareholders, as Energy Transfer wants to return additional cash flows to shareholders in the form of dividend increases or share repurchases after hitting its leverage target.
The thing is, Energy Transfer's cash flows should keep rising for two reasons: pruned down capital expenditures and its upcoming acquisition of Enable Midstream Partners (ENBL +0.00%), which should be immediately accretive to its free cash flow. The prospects are promising, especially in a rising oil-price environment -- which is why Energy Transfer, with its 5.8% yield, is one oil stock you might want to consider now.
