The energy industry has come to life in 2022 as investors have flocked to companies that generate revenue from making physical goods and extracting commodities. It hasn't hurt that cash flow has risen as commodity prices have gone up coming out of the pandemic.
Three companies that I think are still great buy-and-hold investments long-term are ExxonMobil (XOM 0.02%), TotalEnergies (TTE -0.32%), and SunPower (SPWR -1.02%). Here's a look at why they're compelling stocks today.
1. ExxonMobil
I've changed my tune on ExxonMobil over the past year, in large part because the company has changed the way it operates. It's no longer spending more on stock buybacks and dividends than it generates in free cash flow -- it's spending prudently and becoming a cash flow business again. You can see below that free cash flow has surged since bottoming early in the pandemic, and the company has even paid down debt.
The change in spending can be seen in the chart below. Oil prices are near where they were in 2014 when ExxonMobil was spending in excess of $30 billion per year on capital expenditures. This year capital expenditures are expected to be $21 billion to $24 billion, despite rising cash flow. That extra cash can go back to shareholders.
XOM Capital Expenditures (TTM) data by YCharts
I don't think the oil business will be a growth business long-term, but it can be a great cash flow business like the cigarette business has been for decades. And ExxonMobil is trading for a very reasonable 9.0 price-to-earnings multiple and just 7.8 times price to free cash flow. At these levels, the company can buy back debt, buy stock, or pay dividends with excess cash and drive long-term value for shareholders.
2. TotalEnergies
If you think ExxonMobil is cheap, TotalEnergies is even cheaper by most metrics. You can see that the stock trades for just 4.3 times free cash flow, and debt continues to come down.
TTE Free Cash Flow data by YCharts
The argument for TotalEnergies long-term is that the company is investing more in renewable energy. The company recently said it is currently putting 25% of total investments in renewables and electricity, with that number rising to 30% in coming years. Installed renewable energy capacity has increased from 0.7 gigawatts (GW) in 2017 to 10 GW in 2021, with a plan to get to 100 GW in 2030.
Cash flow from the core oil and natural gas business will drive the company's investment in renewables and electricity. That may mean it will keep more funds to invest in these long-term assets than ExxonMobil, which could focus on dividends and buybacks, but that could work out well for shareholders. Given the company's low price-to-free-cash-flow multiple, it should have plenty to spend on high-value fossil fuel projects and growing renewables.
3. SunPower
It's not obvious that SunPower is cheap based on the metrics generally used for oil companies, but I think it's a great way to invest in increasing distributed electricity generation. The company installs solar panels on homes, including energy storage and even bi-directional charging of electric vehicles through a General Motors partnership.
Management expects $90 million to $110 million of adjusted EBITDA this year, with new customer additions increasing over 50% year over year the last two quarters.
SPWR EBITDA (TTM) data by YCharts
What's impressive about SunPower's current place in the market is that it has a relatively capital-light business model with plenty of upside. It provides the products, technology, and sales tools (instant bidding) for dealers around the country, and provides financing through its partners. This allows SunPower to scale on the back of local installers.
Where upside is emerging is with value-added products like EV charging and energy storage, which are both upfront revenue generators and potentially long-term assets. As more energy storage is added to the network, SunPower is utilizing utility programs to help customers monetize their energy storage, of which SunPower takes a cut.
This is a business that's still in its infancy, and with one of the best brands, a premium product, and the right strategy to scale operations, I think SunPower is still a great value today.
Energy stocks have staying power
Many of the things we do in life require energy, which is why it's such an essential and stable business. Whether you're looking at oil stocks or solar energy, there are values out there, and I think ExxonMobil, TotalEnergies, and SunPower lead the way.
