The energy sector is in the midst of transitioning fuel sources, switching from carbon-emitting fossil fuels to cleaner alternatives. This transition will take a few decades and trillions of dollars of investment. Because of that, there are many opportunities to invest in the sector as it seeks to meet the world's current energy needs and future requirements.
Three energy stocks that currently stand out as exceptional opportunities to a few Fool.com contributors are TotalEnergies (TTE 1.07%), NextEra Energy Partners (NEP -1.42%), and Enterprise Products Partners (EPD -0.34%). Here's why they think these stocks are great buys this March.
Getting the mix right
Reuben Gregg Brewer (TotalEnergies): The world will need carbon-based fuels for years to come. The world is also increasingly using renewable power sources. TotalEnergies is reconciling these two trends in a way that is proving highly profitable for investors. To be fair, the stock isn't cheap today, but if you are looking for a long-term investment in the energy sector, the French integrated energy giant should be on your short list.
For starters, TotalEnergies continues to see growth opportunities in carbon fuels. The plan is to reduce oil exposure by focusing only on highly profitable investments while shifting more broadly toward natural gas, a cleaner-burning fuel that is expected to help the clean-energy transition. Meanwhile, management has been using profits from its carbon-tied businesses (which have been very large of late) to build out its clean-energy footprint. Basically, the company is taking a middle-of-the-road approach that distinguishes it from its closest peers.
This slow shift toward clean energy, though, is really a good match for the path the world is taking. And dividend investors looking for an energy stock that is preparing today for the likely different energy landscape of the future will appreciate collecting the stock's generous 4.75% dividend yield along the way (U.S. residents have to pay French taxes, but foreign taxes can be claimed back when filing U.S. taxes). To be fair, TotalEnergies probably won't be an exciting investment, but that's not really the point here; the goal is to be a highly reliable one.
It's time to buy this dividend growth stock on the dip
Neha Chamaria (NextEra Energy Partners): Global investments in clean energy hit a record $1.1 trillion in 2022, according to BloombergNEF. Although investments in electric vehicles and infrastructure made a big leap, the largest chunk of investments was in renewable energy, including wind, solar, hydropower, and biofuels.
This is just the beginning as economies around the globe have only just begun transitioning to cleaner sources of energy. If you haven't bet on this megatrend already, NextEra Energy Partners, with its solid dividends, is an exceptional energy stock you could buy right now.
NextEra Energy Partners acquires and operates clean-energy assets such as wind, solar, energy storage, and natural gas pipelines. There are two things worth noting about its business model. First, the company typically acquires assets from its parent company, NextEra Energy. So NextEra Energy Partners can use the parent's expertise in the industry and has financial backing as well as ample opportunities to grow as the parent keeps dropping down its assets to the entity. Second, nearly all of the energy produced is sold under long-term, fixed-price contracts, and that ensures steady and stable cash flows for NextEra Energy Partners.
It's a win-win for shareholders as NextEra Energy Partners' earnings have excellent growth visibility and can support dividend growth. To put some numbers to that, NextEra Energy Partners expects to grow its dividend per share annually by 12% to 15% through 2026.
NextEra Energy Partners shares have fallen nearly 20% in the past six months, largely on fears of rising interest rates and a recession. With the stock offering a solid yield of 4.9% now, you wouldn't want to miss a chance to buy it on a dip.
One of the sector's best
Matt DiLallo (Enterprise Products Partners): Enterprise Products Partners is one of North America's largest and best-run midstream companies. The master limited partnership (MLP) has steadily expanded its operations over the years, growing shareholder value in the process. The company has increased its distribution to investors in each of its 24 years as a public company.
Enterprise strives to deliver sustainable growth. It focuses on making high-return investments that grow the value of the company (evidenced by its average return on invested capital of 12% over the last decade). Meanwhile, it has a very conservative financial approach. The company currently generates enough cash flow to cover its distribution by a comfy 1.9 times. That enables it to retain lots of cash to help finance its expansion, allowing it to maintain a strong balance sheet. It has one of the highest credit ratings in the midstream sector, backed by a very low 2.9 times leverage ratio.
The MLP should continue growing value for investors in the future. It currently has $5.8 billion of major capital projects under construction that should come online over the next few years. Enterprise has the financial flexibility to fund those projects and continue making accretive acquisitions as opportunities arise. Those growth drivers will supply the company with incremental cash flow to allocate toward growing shareholder value, including continuing to increase its already sizable 7.5%-yielding distribution.
That likelihood of continued value-creating growth makes Enterprise Products Partners stand out as an exceptional energy stock to buy this month.
