The energy industry has delivered an underwhelming performance in 2023. Falling oil and gas prices, along with rising interest rates, weighed on the sector.
However, 2024 could be a much different story for the industry. Several energy companies have compelling catalysts on the horizon that could fuel growth in the coming year. Noble Corporation (NE 1.83%), Clearway Energy (CWEN 0.26%) (CWEN.A 0.28%), and Canadian Solar (CSIQ 4.48%) stand out to a few Fool.com contributors as smart energy stocks to buy for 2024, given their high-powered total return potential.
Perfect timing
Tyler Crowe (Noble): The offshore oil industry is setting up for a few good years, and few companies are better positioned to take advantage of that than offshore rig company Noble. Instead of focusing on its high-specification fleet or its pristine balance sheet. I want to focus on one element that makes 2024 look like a great year for Noble: Its contracts.
Offshore rig companies lease their fleets to oil producers and use contracts that depend on the size of the job. Most of these contracts pay a set rate per day (there are some bonuses for efficiency and operational uptime, but that's getting too deep into the weeds). The market rate for these rigs depends on the amount of work producers want to do, the fleet of rigs that can handle the job, and the fleet of rigs that are available to do that job.
As of the most recent report from Wood Mackenzie, about 85% of offshore rigs are contracted, and several oil producers will be looking to contract new rig work in 2024. That same WoodMac study said rates for high-specification rigs could be more than $500,000 per day.
Right now, the average rate for Noble's fleet is $404,000 per day, but close to 75% of its rigs are either finishing up a contract or at a repricing event for longer-term contracts. If analyst predictions prove correct, Noble could lock in some monster rates for its fleet in 2024 that would probably flow to the bottom line.
A fully powered dividend growth plan
Matt DiLallo (Clearway Energy): Shares of Clearway Energy have slumped nearly 17% in 2023. The main culprit has been rising interest rates. They've caused concerns that funding new renewable energy projects would become too costly, which could slow the sector's growth.
However, interest rates aren't an issue for Clearway because it already has all the funding needed to support its growth plan through 2026. Last year, the company sold its thermal assets, giving it a boatload of cash to redeploy into higher return opportunities. The clean-energy producer has already secured deals to put all that cash to work in transactions that should close over the next couple of years. That gives it a clear line of sight on future cash flow growth.
The visibility into its future cash flows drives the company's conviction that it can grow its dividend (which yields 6% following its sell-off) in the upper end of its 5% to 8% annual target range through 2026. Meanwhile, recent contract renewals on some gas-fired power plants have given it a head start on growth beyond 2026. Those higher rate renewals alone could help power dividend growth toward the low end of its range in 2027.
Clearway's high-yielding and steadily rising dividend provides investors with a strong base return. Add in earnings growth and the likely fading of interest rate headwinds as the Federal Reserve starts cutting them next year, and the clean energy producer could produce powerful total returns in 2024 and beyond.
Deeply discounted solar giant primed for the recovery
Jason Hall (Canadian Solar): Say it with me: cyclical shifts; secular trends.
What this means for investors is that solar stocks are not "buy anytime" investments. During peak euphoria, investors can bid up solar stocks to unreasonable valuations, only to see the stocks crash when the cycle turns away from growth:
To be clear, not every solar stock crashing from a cyclical high has been a buy; plenty of less-than-stellar companies have gotten caught up in the good times only to never recover.
I don't think that's likely to be the case with Canadian Solar, a giant in the solar industry. Canadian Solar manufactures solar panels and energy storage systems for both the distributed and utility scale markets, and its Recurrent Energy subsidiary is a major developer of renewable energy projects. It's also one of the most profitable of the large solar companies, too.
Despite the slowdown in the second half of 2023, management is expecting a bumper year in 2024 for both solar and battery storage, while the market is pricing it for a disaster. At recent prices, shares trade for 5 times trailing earnings, and 65% of book value. With almost $2 billion in cash on hand and a manageable debt load, its balance sheet is sufficient to bridge across the current downturn to the back half of 2024 when business should start to recover, potentially in some very big ways.