2 Energy Stocks to Buy Hand Over Fist in August

The energy sector has been down for much of this year. Oil and gas prices have been lower, which has impacted the sector's earnings and cash flow, weighing on valuations.

However, oil prices have quietly rallied over the past month, which could continue. That rebound could give energy stocks the fuel to rally.

On top of that, a few energy stocks have some upside catalysts of their own. Enterprise Products Partners (EPD 0.45%) and Chevron (CVX 0.37%) stand out for their near-term growth drivers. That makes them ideal energy stocks to buy hand over fist this August.

The coming cash-flow wave

Enterprise Products Partners recently reported its second-quarter results. The energy midstream giant felt some of the impact from lower commodity prices. They caused its adjusted cash flow from operations (CFFO) to decline from $2.4 billion last year to $2.2 billion this year. 

However, the master limited partnership (MLP) still produced enough cash to cover its distribution (which currently yields 7.5%) with $639 million to spare. That provided nearly all the money needed to finance expansion projects ($683 million of growth-related capital expenditures, or capex, in the second quarter).

The company's growth-related spending should provide a meaningful boost in the coming quarters. Enterprise Products Partners completed four major capital projects over the past quarter ($2.5 billion of investment). In addition, it has two more projects on track to enter service by year-end (bringing its 2023 expansion project completion total to $3.8 billion).

Long-term, fee-based contracts support most of these investments. Because of that, it should generate significant incremental cash flow.

Meanwhile, improving commodity prices should lift the company's margin-based earnings. These two growth drivers would give the company more fuel to increase its high-yielding distribution (the MLP has already raised the payout by 5.3% over the past year). They could also help lift the company's valuation, which, combined with its lucrative distribution, could enable Enterprise Products Partners to produce a strong total return. 

A seemingly perfectly timed deal

Chevron produced solid earnings during the second quarter despite lower commodity prices. While the company's adjusted earnings of $5.8 billion were nearly half what it produced in the year-ago quarter when crude was in the triple digits, it was a better-than-expected result. 

Meanwhile, the oil giant produced lots of cash ($6.3 billion in CFFO and $2.5 billion in free cash flow). That helped give it the flexibility to send a record $7.2 billion in cash back to investors through dividends ($2.8 billion) and share repurchases ($4.4 billion).

Chevron utilized its strong balance sheet to cover the shortfall. It ended the period with an excellent net debt ratio of 7%, which was still below its year-ago level (8.4%), even though cash returns outstripped cash flow.

Chevron's cash flow should get a boost from higher oil prices in the coming months. Crude was recently over $80 a barrel after spending most of the second quarter closer to $70. The incremental earnings and cash flow from higher oil prices could help fuel a rally in Chevron's stock.

On top of that, Chevron's cash flow will get a lift from its $7.6 billion acquisition of PDC Energy, which should close later this month. The oil giant expects the deal to be accretive to its earnings while boosting its annual free cash flow by $1 billion.

That assumes oil will average around $70 a barrel. With oil recently rebounding above $80 a barrel, the deal could be even more accretive to its free cash flow. That would give it even more money to return to shareholders, potentially helping power strong total returns.

Catalysts upon catalysts

Higher oil prices could drive up many energy stocks in the coming months because it will boost their earnings. On top of that, Enterprise Products Partners and Chevron have additional growth catalysts on the horizon that should further bolster their cash flow.

Because of that, they could deliver even stronger total returns. That upside potential makes them stand out as some of the best energy stocks to buy this August.