The energy sector is an important part of the global economy. It provides the fuel and the energy needed for the growth of and into developed nations. As such, it’s one of the areas that come with massive investor interest.
However, investing in energy can prove to be pretty risky. Economic headwinds combined with supply-and-demand uncertainties can make it difficult to choose strong investments that are likely to grow over time.
Nonetheless, making the right moves when investing in energy stocks can be an incredibly fruitful endeavor. For example, in 1990, Exxon Mobil stock traded at around $12 per share. By March of 2021, the stock was trading at above $58 per share after becoming one of the key pieces to the energy infrastructure puzzle in the United States and around the world.
If you had invested $10,000 in Exxon Mobil in 1990, your investment would be worth more than $48,300 today. Not to mention, you would have received even more money in dividend payments, which works out to an additional 5% return per year according to Blue Harbinger Investing Research. Depending on which year in that span you’re talking about, that would have accounted for between $500 and $2,700 per year in added dividend income while enjoying one of the best dividend yields on the market.
Those kinds of returns are nothing to sneeze at.
At the same time, the energy sector is likely to undergo a major change as a changing political climate in the U.S. puts emphasis on clean energy. Joe Biden is now the president and the Democratic Party — a party that has long been proponents of clean energy — controls Congress. With a major shift toward clean energy likely on the horizon, massive opportunities are beginning to emerge in the sector.
So it’s not surprising to see that so many investors are looking to try their hand at investing in energy stocks.
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Best Energy Stocks to Buy in 2021
As with any investment made in any sector, it’s always a good idea to do your research and find what you believe to be the stocks with the highest potential to generate returns. Some of the best energy stocks you may want to start researching are listed below.
1. Exxon Mobil Corporation (NYSE: XOM)
Exxon Mobil had a tough run in 2020, but has been in a strong recovery since November. Its stock price fell more than 50% as the result of demand concerns associated with the COVID-19 shutdowns and the resulting oil supply surplus. Nonetheless, the declines proved to be an opportunity as the stock saw a tremendous run at the end of 2020 and early 2021, nearly climbing back to pre-COVID-19 pandemic levels.
Although Exxon Mobil’s stock was down as oil prices offered little support, the company showed a strong display of financial strength, continuing to pay investors dividends throughout the pandemic. In fact, the stock comes with one of the strongest dividend yields in the space, which currently sits at well over 6%.
Moreover, many believe the company will make a run for the top in the long run thanks to its diverse clean energy portfolio.
There’s no doubt Exxon Mobil isn’t giving up its core traditional crude oil, natural gas, and fuel business any time soon. The company owns one of the largest chains of consumer gas stations, several oil refineries, and other companies that meet energy needs using traditional fuel sources. However, knowing that the world is looking for more clean energy options, the company is making massive investments in this space as well.
In fact, Exxon Mobil is one of the leaders in the world of carbon capture and storage (CCS) technology. Carbon capture technology has the potential to capture about 90% of carbon dioxide (CO2) emissions from the use of crude oil in energy, ultimately making energy production a much cleaner process. The captured carbon can then be used in various environmentally positive ways. According to Vox, CO2 generated from CCS technology is used in applications including the production of more sustainable concrete and algae-based feedstock.
Exxon Mobil controls about one-fifth of the CCS industry, making it the largest player in a section of the clean energy industry that’s beginning to gain real interest. Moreover, the company has been involved in the capture of about 40% of all captured anthropogenic CO2 around the world.
With Exxon Mobil’s position as a leader in traditional energy and the CCS corner of the clean energy sector along with its ability to maintain a strong dividend yield in the face of the coronavirus pandemic, the company is already pretty impressive. Add in the discount to its share price caused by COVID-19-related declines and the potential for a rebound as oil prices recover, and the potential for tremendous gains becomes hard to ignore.
2. FuelCell Energy, Inc. (NASDAQ: FCEL)
FuelCell Energy is a small, lesser-known company. As the smallest company mentioned here, it’s the most risky investment opportunity on this list. Notwithstanding the risks, it’s also the stock that may have the largest long-run potential to generate serious gains as a cornerstone in clean energy.
FuelCell Energy is the developer of proprietary fuel-cell technology designed to deliver clean energy at efficient costs. In fact, it’s this technology that lies at the heart of the CCS technology Exxon Mobil is investing hundreds of millions of dollars in.
FuelCell Energy is a key beneficiary of these investments. It started a collaboration with Exxon Mobil several years ago, which is clearly going well. The collaboration has already contributed tens of millions of dollars to FuelCell’s balance sheet and will continue to do so in the future.
In December of 2019, FuelCell Energy announced that it expanded its relationship with Exxon Mobil with regard to the development and use of next-generation carbon capture technology. As a result, FuelCell now has access to an additional $60 million in revenue over the course of two years.
As of July 2020, the company traded with a market cap of around $600 million. So, this contract represented revenues equal to around 10% of the company’s entire value. Fast forward about a year, and the clean energy stock is trading with a market cap of around $4.6 billion as of March 2021.
The magnitude of this deal is already impressive. And when you consider the fact that Exxon Mobil brought Princeton researchers into the carbon capture team, and that all members of the collaboration will benefit from the production of new technologies, it seems as though FuelCell Energy is quickly becoming a cornerstone in the clean energy industry.
To add icing to the cake, the company recently received a U.S. Department of Energy Award worth $8 million. In exchange, the company will further research a technology that has the potential to produce hydrogen, a key component needed to generate energy with fuel cell technology. So, not only is the company innovating in terms of the clean energy-producing technology in itself, but it is working to create a supply chain that will make it a cornerstone in the fuel cell industry.
Of course, it’s important to consider the risks with smaller-cap stocks. In this case, you should be aware of the following:
- FuelCell Energy Doesn’t Generate Profits Yet. Although the stock currently trades in the large-cap range, FuelCell Energy currently operates at a loss and is projected to continue to do so for at least the next year. That means the company may have to move forward with transactions that dilute the value of shares and lead to stock declines in the future as it continues to perfect its clean energy technology and sales process.
- Volatility. While FuelCell Energy isn’t a small-cap company anymore, it wasn’t long ago that this was the case. Moreover, the stock continues to trade with heavy volatility, much like activity that’s commonly seen among small-cap or penny stocks. With the stock being much more volatile than blue-chip stocks, beginner investors will likely find it challenging to time entrances and exits.
- Fuel-Cell Technology Is Highly Speculative. Fuel-cell technology is relatively new. While the concept has been proven, and the technology is in use today, FuelCell Energy is by no means the go-to source for clean energy. Investing in the company is a bet that not only will carbon capture technology become a major part of the clean energy industry, but that FuelCell Energy will be one of the leaders of this subsector.
If you’re willing to take on the unique risks that come with FuelCell Energy, the stock represents a high-risk, high-reward opportunity to get in on the ground floor of what is quickly becoming a multibillion-dollar industry. Not to mention the wide swings in valuation in the short term make great trading opportunities for the investor with strong technical analysis skills.
3. Chevron Corporate (NYSE: CVX)
Chevron is another household name in the energy industry. Best known for its massive chain of gas stations, the company is among the top in the energy sector, ranking with the likes of Exxon Mobil. Like Exxon Mobil, Chevron has deep roots in the production of crude oil, liquid natural gas (LNG), and refined fuels.
As with Exxon Mobil, Chevron shows no intention to give up traditional energy business. However, when it comes to future energy consumption demand, the company is preparing for the world of clean energy in a big way.
So far, Chevron has invested millions of dollars into several key areas of clean energy, including:
- Biofuels. Chevron is an important player in the biofuels game. Not only does the company create biofuels from its own feedstocks, but it also partners with several biofuel technology companies, service providers, and producers as it looks to corner this subsector of the energy industry. The company even has an agreement with waste disposal company Waste Management to refine the trash it collects to create biofuels to run trash pickup service vehicles, making it so that these trucks are powered by renewable energy.
- Solar. Chevron is in the process of evaluating solar technologies at three different sites in California. Its research has led to the company signing a 20-year potential term power purchase agreement with SunPower, a leader in solar solutions, to power Chevron’s Lost Hills Oil Field.
- Wind. Chevron’s involvement in wind energy is impressive, to say the least. The company commissioned what is now known as the Casper Wind Farm in 2009. Today, the 16.5-megawatt facility generates enough power to provide energy to 13,000 homes in the United States.
- Geothermal. Finally, Chevron entered into a joint venture involving a 49-megawatt geothermal facility in California. The facility produces enough energy to power about 40,000 homes.
Unfortunately, another similarity Chevron shares with Exxon Mobil is the fact that both stocks experienced significant declines as a result of the coronavirus pandemic. Although Chevron’s stock has seen some upward movement in recent months, there’s still a long way to climb, but that’s not necessarily a bad thing because the low valuation offers a discounted opportunity to get in on a potentially lucrative future.
Also like its peer, while the company continues to invest in clean energy infrastructure, it also continues to show investor appreciation with a strong dividend yield, which it maintained even in the face of the pandemic.
With the company’s solid foundation as a traditional energy play and its aggressive expansion into the renewable energy sector, Chevron stock is one worth considering.
4. NextEra Energy Inc (NYSE: NEE)
NextEra Energy may not be a household name, but it powers more households than any other publicly traded utility company in the world. The company owns names like Florida Power and Light and Gulf Power Company, providing electricity to 5.5 million and 394,772 customers respectively. These are just two of the company’s several utility provider subsidiaries that serve customers from big cities to rural towns. The company’s role in energy infrastructure is jaw dropping.
According to CSIMarket, NextEra controls about 6.71% of the energy subsector of the United States utility market. There’s a strong chance you or one of your friends, family members, or acquaintances buys their energy from NextEra Energy.
NextEra Energy has also stayed far ahead of its competitors when it comes to the clean energy trend. Due to the company’s early adoption and massive investments in clean energy, it’s currently the largest generator of solar and wind energy in the world.
Impressively, while NextEra Energy is among the 10 largest energy companies in the world, it is the only company that can claim that title which also isn’t involved in the traditional crude oil and gas industry — yet another source of validation that the company is doing incredibly valuable work.
Finally, NextEra Energy is one of few energy companies that are shielded from COVID-19 and other economic headwinds. As a utility company without reliance on oil, it has a unique advantage. Whether consumers are staying home or venturing out, they are consuming power. In fact, NextEra Energy’s management has made multiple statements suggesting that if the company doesn’t produce earnings at the high end of its guidance, it will be upset. As a result of this strength, it is one of the few energy stocks that is trading well above pre-pandemic highs.
While Next Energy’s dividend yield is relatively low compared to other energy stocks, the company has continued to pay dividends to investors throughout its history, even throughout the COVID-19 pandemic. Moreover, the continued investments the company is making into clean energy infrastructure are likely far more valuable than a stronger current dividend yield.
All in all, in the long run, NextEra Energy stock is likely to continue doing what it does best — producing strong revenue, earnings, and gains for investors.
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5. Kinder Morgan (NYSE: KMI)
Kinder Morgan is one of the largest energy infrastructure companies in the world. While the company isn’t a producer of crude oil, liquid natural gas, or other traditional energy products, it is important in the transportation and storage of these products.
The company owns around 85,000 miles of pipeline and 152 terminals that transport natural gas, crude oil, refined oil products, carbon dioxide, and other products that support the energy industry as it’s known today.
Unfortunately, although Kinder Morgan doesn’t produce energy-related commodities, its heavy involvement in the sector means that it has also been dealt a heavy blow as COVID-19 brought down commodity prices. Nonetheless, the company seems to have done all the right things in order to weather the storm.
In order to shield itself from the economic impact of the COVID-19 pandemic, Kinder Morgan scaled back expansion efforts by 30%. Ultimately, this helped the company maintain a strong balance sheet and keep debt to a minimum — something that every stock in the energy sector should be focused on at the moment.
Although Kinder Morgan has done a great job of reducing expenses, expansion hasn’t come to a complete halt. The company continues to move forward with the 430-mile Permian Highway Pipeline Project in the Permian Basin in the southwestern U.S. for the transportation of liquified natural gas. At last update, the Permian Basin pipeline was opened and operational in late January.
As a result of the company’s smart financial decisions and continued strength, Kinder Morgan hasn’t just maintained an impressive dividend throughout the pandemic; it continues to increase its dividend payments, giving it one of the strongest dividend yields in the energy industry of well above 4%.
The company is also making important moves to clean up its act, so to speak. Although Kinder Morgan is heavily focused on traditional energy, the company is beginning to focus its pipelines toward clean energy products like renewable natural gas and hydrogen. As the world pushes toward clean energy, Kinder Morgan will not be left behind.
With a strong history of leadership in the energy sector, unmatched energy infrastructure, impeccable financial stability, and a shift toward clean energy, Kinder Morgan one of the most impressive energy stock picks out there. Add in a best-in-class dividend yield and this stock is one that’s hard to ignore.
Consider Investing in Energy-Focused ETFs
The energy industry is complex, making it difficult for many to decide where to nest their investments within the space. If you find assessing opportunities in energy difficult, or simply don’t have the time to adequately research opportunities in the sector, there’s another option.
Energy focused exchange-traded funds (ETFs) provide diversified exposure to the energy sector.
There are a ton of ETFs on the market today, each with its own goals, strategy, and history. Many of these ETFs are focused solely on the provision of exposure to the energy sector. Some may invest in blue-chip energy stocks, others may invest in emerging market energy stocks or small-cap energy stocks, but they are all focused on energy investments.
The most popular ETFs are managed by some of the brightest minds on Wall Street. By investing in these ETFs, you’re investing in a diversified portfolio of energy assets while minimizing the research necessary to be effective in the space,
Nonetheless, less research isn’t synonymous with no research. Before investing in any ETF, it’s important to look into its historic performance, expense ratio, and assets held to get an understanding of what you’re investing in.
Investing in the energy sector can be risky, especially as the energy industry goes through a clean energy overhaul. Nonetheless, making the right moves in the space can lead to strong gains.
When investing in the energy sector, it’s important to consider the shift from traditional power to renewable, environmentally friendly energy that’s taking place. The companies with the most potential are those that have a proven track record of growth and are consistently working to transition to low-cost energy alternatives.
Disclosure: The author currently has no positions in any stock mentioned herein nor any intention to hold any positions within the next 72 hours. The views expressed are those of the author of the article and not necessarily those of other members of the Money Crashers team or Money Crashers as a whole. This article was written by Joshua Rodriguez, who shared his honest opinion of the companies mentioned. However, this article should not be viewed as a solicitation to purchase shares in any security and should only be used for entertainment and informational purposes. Investors should consult a financial advisor or do their own due diligence before making any investment decision.