2 Beaten-Down Energy Stocks to Buy on the Dip (and 1 to Avoid Like the Plague)

Last year was a challenging one for the energy sector. Lower oil and gas prices, along with higher interest rates, weighed on the sector. Energy stocks in the S&P 500 index lost about 4% on the year, compared to a 24% gain for the broader market index.

That sell-off has many energy stocks looking like relatively attractive buying opportunities. However, not all are worth buying after last year's downdraft. Chevron (CVX 0.37%) and NextEra Energy (NEE -1.36%) are two that look like great ones to buy on the dip. However, Tellurian (TELL 7.71%) is one energy stock that investors should avoid like the plague, even though its share price is a lot lower these days.

It is too risky, even if it's a lot lower-priced

Tellurian had a rough 2023. Shares of the liquefied natural gas (LNG) export facility developer plunged 55%. The main factor weighing on the stock was concerns about how it would finance its massive Driftwood LNG export facility and related Driftwood Pipeline Project.

Those projects are a massive undertaking. Tellurian estimates that phase one will cost about $14.5 billion. That's a lot more than the company can handle on its own, given its current size ($800 million enterprise value). It's seeking equity partners to help fund more than half the project's equity requirements.

However, rising interest rates and falling natural gas prices have made finding partners interested in the project more challenging. It's seeking to partner with oil and gas producers that would also use a large portion of the facility's capacity to export their gas. That limits its options.

Because of that, there's a significant risk that Tellurian might not find the partners needed to fund this project at acceptable terms. That makes the stock too risky for most investors, which is why they should avoid it like the plague.

Adding more fuel to its dividend growth engine

Lower oil and gas prices weighed on shares of Chevron last year, which fell about 17%. However, that dip looks like an attractive buying opportunity.

One factor fueling that view is Chevron's moves over the past year to enhance its cash flow and growth profile. The company acquired PDC Energy in a $7.6 billion deal to enhance its operations across two key U.S. energy basins. Chevron sees the deal adding $1 billion to its annual free cash flow in 2024, assuming oil averages around $70 per barrel (right around the current price).

In addition, Chevron also agreed to buy Hess in an even bigger deal ($60 billion) that it expects to close this year. That acquisition enhanced its existing operations while adding a new growth driver (Guyana). The company expects it to be accretive to its free cash flow while extending its growth profile into the 2030s.

That drives Chevron's plans to return more cash to shareholders this year. It expects to increase its dividend by another 8% this month (pushing its growth streak to 37 years). That's a higher rate than last year, when it boosted its payment by 6%.

Chevron also anticipates increasing its share repurchase rate by $2.5 billion, pushing it to the top of its $10 billion to $20 billion annual range. That higher buyback will enable Chevron to repurchase more of its beaten-down shares. With its stock price down while free cash flow growth is accelerating, Chevron looks like a bargain buy these days.

Plugged into a powerful growth driver

Higher interest rates weighed on NextEra Energy stock last year. The clean energy-focused utility slumped 27%, due mainly to slowing growth at its affiliate, NextEra Energy Partners.

However, NextEra Energy doesn't see its growth slowing. It reaffirmed its financial expectations through 2026, targeting earnings growth toward the upper end of its 6% to 8% annual range. It also anticipates increasing its dividend by around 10% annually through at least this year.

NextEra Energy has already locked in much of its growth. Government regulators must approve expansion-related investments and rates for its electric utility in Florida. Meanwhile, NextEra's energy resources segment signs long-term contracts supporting its renewable energy and electricity transmission line projects.

The third quarter was the company's best ever for securing new renewable and energy storage projects. It added over 3.2 gigawatts (GWs) to its backlog in the period, which now totals 21 GWs. That's significant, considering that the current operating portfolio of its energy resources segment is a world-leading 34 GWs.

Meanwhile, NextEra should have plenty of power to continue growing beyond 2026. The company estimates that the U.S. needs to invest $4 trillion by 2050 to fully decarbonize the economy by building 26 times its renewable energy capacity at the end of 2022. That massive opportunity should provide NextEra Energy with plenty of growth in the future.

A higher probability of success

Tellurian believes it can find the partners needed to build its Driftwood project. If it can, the stock could be a big winner.

However, there's a real risk it could fail, which is why investors should avoid its stock like the plague and consider buying Chevron or NextEra Energy instead. They're much more likely to grow in value for their shareholders in the future, making their dips look like compelling buying opportunities.