When Wall Street is in love with an investment idea, prices quickly go to irrational levels. The opposite holds true as well. Investment themes the Street hates get the opposite treatment. Savvy investors with a value bent, however, are able to pick out misunderstood opportunities from out-of-favor ideas.
Right now energy-related stocks are out of favor in a world obsessed with cleaning up its carbon footprint, a task that will take decades to complete. That is why foreign high-yield stocks Suncor (SU 0.67%), TotalEnergies (TTE -0.61%), and Enbridge (ENB -1.64%) are all worth deep dives, with a particular focus on their clean energy transitions and ambitions.
1. Mining for oil, and more
Suncor is an integrated energy company, with a big business in the Canadian oil sands. Technically speaking, it mines oil-filled earth called bitumen, processes it, and extracts the oil within. Oil sands mines are expensive to build but relatively cheap to operate, and they have extremely long production lives -- much longer than what you could expect from a fracked well in the United States. This view of the company is partly why it has a fat 5.5% dividend yield.
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While being a big Canadian oil sands name, refining makes up around half of the Calgary, Alberta-based company's funds from operations. Its low-cost oil sands production helps smooth out Suncor's overall performance since lower crude oil prices are often beneficial for refiners as it mears lower input costs for their refineries. And it is also starting to dip its toes into the clean energy space, with investments in a vehicle charging network, carbon capture technology, and a wind farm.
Like the other names on this list, it is using its cash cow energy operations to help move toward a cleaner future. Notably, it has targeted net zero emissions by 2050. That said, it recently returned its dividend to its pre-pandemic level, with third-quarter funds from operations payout ratio of just 25% or so. So the dividend looks pretty solid as Suncor works to both become more efficient in its current energy operations while it expands into new, cleaner areas. Its business is tied to commodity prices, so results can be volatile -- but this foreign stock is worth a deep dive given its high yield.
2. In the middle, and more
The next name on the list, Enbridge, also hails from Canada. Roughly 83% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) comes from oil and natural gas pipelines. Another 14% comes from a natural gas distribution business, which is basically a utility operation. These are all toll-taker businesses, for which Enbridge gets paid a fee for the use of its assets. So demand is more important than energy prices to the company's top and bottom lines, allowing it to avoid the extreme ups and downs inherent in the drilling business as it generates fairly consistent cash flows. That's why it has been able to increase its dividend annually for more than 25 consecutive years, making it a Dividend Aristocrat. Meanwhile, partly because of its ties to the energy sector, the stock yields a fat 7.3%.
Like Suncor, however, Enbridge is looking to use its cash cow operations to transition toward a cleaner future. It has a series of sizable offshore wind farms being built in Europe right now that will help to increase the size of its clean energy business by 33% in 2022. That sounds huge, but renewable power is really just going from 3% of EBITDA to 4%. However, a third of the company's capital spending going forward is dedicated to clean energy, so look for this segment to become increasingly important. All in all, it's an out-of-favor name with a future that looks likely to be more and more clean thanks to its largely fee-based carbon-related businesses.
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3. Giant, integrated, and more
The last name on the list is French integrated energy giant TotalEnergies. This company offers a yield of 6.3%. The real claim to fame here, however, is that during the energy downturn in 2020 it held its dividend steady while European peers like BP and Shell cut their payments. In fact, TotalEnergies even provided investors with a benchmark to watch -- $40 per barrel oil. As long as oil averages more than that figure, management said it could keep supporting its dividend, believing that dividends were important to shareholders.
What was interesting here was that BP and Shell cut their dividends at just about the same time they announced plans to shift more toward clean energy investment. TotalEnergies made that same commitment, with the goal of tripling the size of the "electrons" division by 2030 (bringing the group to 15% of the business). At this point, with oil prices well above the $40 level, management is even talking about being able to increase the distribution while still moving toward its clean energy goals. Again, the core story is that TotalEnergies is using the oil and gas business it operates as a foundation to expand into the clean energy sector. If you like high yields and misunderstood stocks, it's worth a closer look.
Tarred with the wrong brush
Investors often throw the baby out with the bathwater when they are downbeat on a sector. Yes, there are a lot of energy stocks out there that are sticking to their knitting. However, Suncor, Enbridge, and TotalEnergies are all taking a slightly different approach, looking to use still in-demand oil operations to venture into cleaner spaces as they look to provide the world with the energy it needs. And if you can look past the taint of their carbon fuel operations, you can collect fat yields from these foreign stocks while they overhaul their businesses.
