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The Future Of Energy: 3 Stocks To Watch

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The energy sector has been in a tailspin since the beginning of 2020, with global supply surpassing demand. The pandemic flattened demand, and we had an unprecedented supply glut on our hands. The US energy sector actually ran out of places to put the excess oil for the first time in history. 

The massive supply and demand disparity led to the seemingly impossible negative oil quotes on April 20th when crude oil futures plummeted to -$40 per barrel. Suppliers were forced to pay customers to take this lucrative commodity off their hands.

Energy stocks have been heavily discounted across the board this year, and investors are beginning to speculate whether these stocks will ever make new highs. Let’s dive in and take a look at what the future holds for the energy sector.

Short-Term Outlook (next 12 months)

Oil prices are beginning to recover, and the world is wondering if demand will ever reach pre-COVID levels. The massive oil inventories and excessive supply are expected to restrict the upward pricing pressure of oil for the remainder of 2020. But 2021 is a different story.

In EIA’s Short Term Energy Out Look they estimate that “global liquid fuels inventories rose at a rate of 6.4 million barrels per day (b/d) in the first half of 2020 and expects they will decline at a rate of 4.2 million b/d in the second half of 2020 and then decline by 0.8 million b/d in 2021.”

This inventory depletion, combined with swelling demand from a recovering global economy, should create a situation where oil prices appreciate in 2021 from their currently depressed levels. Below is a chart of EIA’s production and consumption forecast for liquid fuels. 

The US has been producing an increasing share of the world's oil supply, and this is expected to continue through the next decade. This trend is taking control away from OPEC, who had been able to set their own global prices for decades. Today, US shale giants like Exxon Mobile (XOM - Free Report) and Chevron (CVX - Free Report) have become some of the world's largest energy companies. They are dedicated to maintaining their dominant positioning in the industry, no matter where the energy sector is headed.

These two stocks will recover over the next year. I'm not claiming that they will hit new highs, but I am confident that the worst is behind us. CVX and XOM are both devoted to maintaining their lofty dividends and have the liquidity to do so. These stocks high single-digit yields are almost as safe as US Treasury bonds as these firms have no intention of cutting the dividends that shareholders have relied on for almost a century.

Long-Term Outlook

There is no doubt that the world is headed towards sustainable and less pollutant energy, but this transition is going to be much slower than many anticipate. Demand for both natural gas and oil will continue to rise over the next decade with energy needs.

Still, there will be mounting worldwide efforts to reduce emissions and transition to alternative & renewable sources of energy. These efforts will likely be enforced by both domestic and global authorities.

Gas is expected to see a sharper increase in utilization as liquified natural gas (LNG) investments spike amongst all energy companies in recent years. This is seen as a highly lucrative way for energy businesses to maintain current operations and produce lower emission commodities. Pipelines are expected to be the primary method of natural gas transportation by the end of this decade.

Many energy companies have been investing in alt energy such as LNG, biofuels, hydrogen fuel cells, and other renewable energy sources like solar & wind, but oil remains the most profitable commodity for most energy giants.

NextEra Energy (NEE - Free Report) is one notable exception. This enterprise is leading the charge in the renewable energy space, and its share price appreciation illustrates this anticipated economic shift towards sustainability. NEE has seen returns of more than 165% in the past 5 years (more than doubling the S&P 500) while at the same time yielding a healthy 2% dividend. This innovation-driven energy giant has stayed buoyant even amid the pandemic as the world looks towards the future.

The future of NextEra Energy is bright, being the largest global producer of solar and wind energy, a leader in battery storage, and not to mention maintaining a massive backlog of renewable energy projects. In this indefinite low-interest-rate environment that the Fed has provided the equity markets, NextEra's significant future earnings are now worth more today than ever.

Final Thoughts

Big Energy conglomerates are far from dead, and you better believe that they are looking towards the future. Oil has been and will likely remain a critical top and bottom-line driver for energy firms over the next decade. I suspect that LNG will be growing part of all US energy companies' portfolios. With the US being the largest natural gas producer in the world, American energy is well-positioned for this growing trend.

CVX and XOM are robust long-term buys at their currently discounted valuations. These shares will continue to rebound as the economy is revived, and a resurgence in demand is established.

NEE is making a big bet on renewable energy and it looks to be panning out nicely. These shares have been on a relentless rally for decades as the enterprise pushes towards the future of energy. I suspect that this market outperformer will continue to drive growth in the coming decade.

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NextEra Energy, Inc. (NEE) - free report >>

Chevron Corporation (CVX) - free report >>

Exxon Mobil Corporation (XOM) - free report >>

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