The energy sector had a rather quiet year. The average energy stock in the S&P 500 is only up about 4% year-to-date, compared to a nearly 18% rise by the broader market index. Lower oil prices contributed to the energy sector's lackluster returns.
Despite the sector's recent underperformance, the energy industry remains vital to fueling the economy. Here are my top three energy stocks to buy now to capitalize on the expected continued growth in energy demand.
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ConocoPhillips
ConocoPhillips (COP +2.67%) is a leading oil and gas producer. The company has built one of the deepest and most diversified portfolios in the sector with some of the lowest operating costs. ConocoPhillips currently needs an average oil price in the mid-$40s to sustain its capital spending program and about $10 more per barrel to fund its dividend. With crude oil currently priced in the low $60s, ConocoPhillips is generating a substantial amount of surplus free cash flow.
The company expects its breakeven level to steadily fall over the next several years as it captures more cost savings from last year's Marathon Oil megadeal. Additionally, the company expects to complete three large-scale liquefied natural gas projects and its Willow oil project in Alaska by the end of the decade. These catalysts will add an incremental $6 billion in annual free cash flow by 2029, assuming a $60 oil price. That's a meaningful increase for a company that produced $6.1 billion in free cash flow through the first nine months of this year.
NYSE: COP
Key Data Points
ConocoPhillips' growing cash flow will give it more money to increase its 3.4%-yielding dividend. It recently hiked its payout by 8% and aims to deliver dividend growth within the top 10% of companies in the S&P 500 in the future. Additionally, the company plans to continue repurchasing shares. This combination of growing cash flow and cash returns could give ConocoPhillips the fuel to produce a robust total return for investors over the next few years.
Oneok
Oneok (OKE +0.71%) is one of the country's largest energy midstream companies. The pipeline company generates very stable cash flow backed by long-term contracts and government-regulated rate structures. This cash flow supports the company's high-yielding dividend (5.6% current yield).
NYSE: OKE
Key Data Points
The company has spent the past few years strategically expanding its midstream platform by making a series of acquisitions. It acquired Magellan Midstream Partners in a transformational transaction in 2023 to expand into crude oil and refined petroleum products infrastructure. It followed that up last year by purchasing Medallion Midstream and a controlling interest in EnLink for $5.9 billion, before acquiring the remaining interest in EnLink for $4.3 billion earlier this year.
Oneok expects to capture hundreds of millions of dollars in cost savings and other synergies from these deals over the next few years. Additionally, the pipeline company has approved several organic expansion projects, including the construction of the Texas City Logistics Export Terminal and the Eiger Express Pipeline. These projects should enter commercial service by the middle of 2028. Oneok's growth drivers should provide it with the fuel to increase its already attractive dividend by 3% to 4% annually. That combination of growth and yield could fuel high-octane total returns for investors.
NextEra Energy
NextEra Energy (NEE +0.21%) is a leading electric utility and energy infrastructure development company. Its Florida-based utility generates steadily rising rate-regulated earnings. Meanwhile, its energy resources platform produces growing earnings backed by long-term contracts and regulated rates. This cash flow supports the company's attractive 2.8%-yielding dividend.
NYSE: NEE
Key Data Points
The company is investing heavily to support growing power demand in the country. Its utility in Florida expects to invest upwards of $100 billion by 2032 to support the state's growing energy demand. Meanwhile, the company's energy resources platform is investing billions of dollars in building electricity transmission lines, expanding gas pipelines, and developing new clean power projects.
These investments should support more than 8% compound annual earnings-per-share growth over the next decade. That positions the company to increase its dividend by 10% next year and at a 6% compound annual growth rate from next year's level through at least 2028. This combination of earnings and income growth could enable NextEra Energy to produce powerful total returns in the coming years.
Top-notch energy stocks
ConocoPhillips, Oneok, and NextEra Energy have lots of visible growth ahead. As a result, they should have ample fuel to continue increasing their high-yielding dividends. This income and growth could prove to be a powerful combination, giving these energy stocks the fuel to produce strong total returns in the coming years.
