The 6 Best Energy Stocks to Buy Now

Each year, MoneyShow asks the nation's leading financial newsletter advisors for their favorite stocks for the coming year. In our 2020 Top Picks report, six experts chose energy ideas that are poised to benefit from both longer-term sector trends as well as near-term geopolitical tensions. Robert Rapier, Utility Forecaster Since the oil price downturn in 2014, the energy sector has mostly been in a bear market. There are some fundamental reasons for energy's decline, and some psychological ones. From a fundamental perspective, oil and gas prices today are much lower than they were a decade ago. Thus, investor sentiment for the energy industry is decidedly negative. But one company has risen above its peers since the energy bear market began. That company is also poised to outperform once the bear market ends. I am speaking of ConocoPhillips . Today ConocoPhillips is the world's largest publicly traded, pure oil and gas producer. Because the roots of Conoco and Phillips date back over 100 years, the company has experienced numerous oil booms and busts. As a result, ConocoPhillips has adopted a far more fiscally responsible approach to drilling than many of its competitors. When oil prices declined, the company took defensive measures. It sold assets, paid down debt, cut its dividend, and put itself in a position to profit in an era in which oil prices might be $50 a barrel. The result has been a steady increase in the company's cash flow. Since 2015, cash flow has increased each year. In fact, today ConocoPhillips is generating more cash flow with oil prices in the $50s than it was in 2013 when oil prices were over $100. ConocoPhillips has been a shareholder-friendly, cash-generation machine despite oil prices that remain below $60. Also, in November the company held an Analysts and Investors Meeting at which they unveiled a 10-year strategic plan. Net debt is a quarter of what it was just three years ago, but the company has increased by 50% its oil and gas resource that breaks even at a $40 WTI price. No other independent oil and gas producer can come close to these financial measures. Over the next decade, the company projects that it will generate about $50 billion in free cash flow if oil prices remain at $50/bbl. The company's top stated priority is to maintain production and pay its dividend. The company projects a total return to shareholders through dividends and share buybacks over the next decade of $50 billion. This is substantial, given the recent market cap of more than $70 billion. This bear market in oil won't last forever. But ConocoPhillips is built to survive it, and thrive once it ends. Roger Conrad, Conrad's Utility Forecaster At National Fuel Gas , keeping operations conservative is management's basic DNA. The midpoint of company guidance for fiscal 2020 earnings (ending Sept. 30) is now $3.15 per share, down from an initial projection of $3.40. That's due to reduced expectations for natural gas prices. Nonetheless, cost control from tight integration between production and gathering will support 15% higher output this year, followed by single digits in FY 2021. The company also raised proved oil and gas reserves by 23% in the last 12 months. While others fell prey to Wall Street's push to divest regulated utility and midstream assets during the boom times earlier in the decade, NFG stayed united and integrated. The result is solid 1.8 times coverage of the still-growing dividend over the past 12 months, along with a BBB credit rating and stable outlook. Regulated utility and pipeline infrastructure contributed roughly 63% of FY 2019 earnings, essentially covering the dividend on their own with room to spare. And with $270 million to $315 million targeted for system investment, their contribution will grow the next several years, offsetting any future weakness in natural gas prices. Management also continues to boost the balance sheet with opportunistic debt retirement and refinancing, slashing interest expense by 10.3% in the last 12 months. On a valuation basis, National Fuel is cheap relative to the overall market, selling for just roughly 14.9 times the midpoint of FY 2020 guidance. That's typical of energy stocks, whose underperformance has shrunk the sector to just 5% of the S&P 500 from 15% a decade ago. As recently as April of last year, National Fuel shares traded in the low $60s. We expect a return to that level, as regional natural gas prices stabilize and bargain hunters return to the sector, in search of low valuation stocks. The big difference between National Fuel Gas and other energy companies is its unique business model has repeatedly proven its resiliency in tough times. Management has also locked in prices for 87% of its expected FY 2020 output, meaning stable earnings even if gas prices should fall further. There's also the potential for a takeover of the company from its modest current market capitalization of only around $4 billion. Buy National Fuel Gas at $55 or lower. Richard Howe, Stock Spin-Off Investing KLX Energy Services has declined by 78% since its spinoff last year and many of its energy services peers have gone bankrupt. As Baron Rothschild famously said, The time to buy is when there's blood in the streets. Well, there is blood in the Street! But how do we know this isn't a value trap or worse a future bankruptcy? First, the company is conservatively managed and has one of the best balance sheets in the industry. Its debt-to-EBITDA ratio is 1.2x with no debt due until 2025. Further, it has $121 million of cash. Second, the company is run by an excellent and highly aligned management; the management team previously founded B/E Aerospace and KLX Inc. B/E Aerospace was eventually sold to Rockwell Collins for 12.4x EBITDA. KLX Inc. was eventually sold to Boeing for 14.3x EBITDA. Management decided to forgo a salary in exchange for restricted stock in KLXE. My guess is that the company will eventually be sold once energy industry conditions improve. Third, KLXE just concluded its heavy capital expenditure phase and will generate significant free cash flow in 2020. Fourth, KLXE's current unused share repurchase authorization of $49 million represents 33% of its current market cap. I expect to management to aggressively buy back stock. Five, KLXE, trading at 3.6x EBITDA, is dirt cheap. This valuation is cheap on an absolute and relative basis. Note that Apergy , a larger energy services competitor, recently announced that it has agreed to acquire Ecolab's energy division for 12.5x EBITDA. Sixth, there has been heavy insider buying. The CEO, CFO, controller, VP of operations, and several directors have all bought shares in the open market recently. For those with a contrarian streak and the stomach for volatility, I expect it to trade several multiples higher in a couple years. Crista Huff, Cabot Undervalued Stocks Advisor PBF Energy -- my Top Pick for growth & income in 2020 -- is one of the largest independent petroleum refiners and suppliers of unbranded transportation fuels, heating oil, petrochemical feedstocks and lubricants in the United States. The company will close on their purchase of a refinery in Martinez, CA from Shell in the first quarter of 2020. The acquisition gives PBF Energy increased regional diversity and cost synergies, and should be immediately accretive to 2020 EPS. The company is expected to greatly benefit from the International Maritime Organization's new mandate -- IMO 2020 -- that the world's 39,000 ships and tankers must use either scrubbers or low-sulfur diesel fuel, beginning January 2020. Profits and share prices within the energy sector fell in 2019. PBF Energy is expected to finish 2019 with $0.98 EPS, then see profits soar to $4.62 per share in 2020. In addition, the stock offers a yield of around 3.8%. Energy stocks are now rebounding, influenced by a strong U.S. economy, positive trade decisions coming from China, and IMO 2020. There's over 50% of upside potential if PBF Energy returns to its 2018 high above $50 per share. George Putnam, The Turnaround Letter Peabody Energy -- my Top Pick for aggressive investors in 2020 -- is one of the world's largest coal mining companies. It operates 21 mines in the United States and Australia that produce thermal coal used by electric utilities and metallurgical coal (met coal) used by steel producers. About 65% of its production is low-sulfur thermal coal mined in the Powder River Basin in Wyoming. Its Australian mines account for another 18% of total output. Peabody is among the most out-of-favor companies in the market. Investors have returned to momentum stocks, particularly those of companies in low-carbon, high-tech, secular growth industries. With its carbon-intensive, un-tech, secularly challenged product, taint from its recent emergence from bankruptcy, falling profits, loss of a valuable mine due to fire, and a tumbling stock price, Peabody offers almost nothing to most investors. However, while the U.S. thermal coal market is in secular decline, coal will continue to provide an important source of fuel for electricity production. International thermal coal demand remains healthy, driven by growing Asia-Pacific economies, even as investment in thermal coal production is declining. International met coal markets remain in flux near-term, but the long-term demand outlook appears solid as steel is a core component of a growing global economy. We don't believe a collapse in coal prices in either the U.S. or globally is likely. Any pricing strength would be an unexpected positive. Peabody generates considerable cash flow, has a healthy balance sheet, and is managed with shareholders and debt reduction as top priorities. Most importantly, BTU trades at only 3x estimated 2021 EBITDA, based on expectations for a continued slide in profits over the next two years. At this valuation, there is considerable upside potential if things just go less wrong than expected. For disclosure, employees of the publisher of The Turnaround Letter own shares of this stock. Tom Hutchinson, Cabot Dividend Investor Despite the market riding at all-time highs, there is a sector of the market that is actually very cheap -- energy stocks; the sector also happens to pay great dividends, and it might just be poised for a strong year in 2020. Certain energy companies aren't levered to volatile commodity prices but rather collect a fee for the storage and transportation of such. These midstream companies make money on the fact that there is a lot of oil and gas sloshing around the country, and business and future prospects have never been better. Enterprise Product Partners is one of the largest midstream energy companies in the country with a vast portfolio of service assets connected to the heart of American energy production. It has $36 billion in annual revenues from an unparalleled reach in the industry with over 49,000 miles of oil and gas pipelines connected to every major U.S. shale basin and 90% of American refiners east of the Rockies, and offers export facilities as well in the Gulf of Mexico. There are several reasons why EPD is my favorite pick in the energy sector. As a big company it has an advantage as it is much easier to get regulatory approval for expansions to existing facilities than new ones. The company also has great exposure to the fastest growing areas like liquid natural gas (LNG) and crude oil exports. In fact, Enterprise has over $9 billion in major projects under construction that will boost earnings, with billions coming on line in the next year. It also has a pristine balance sheet with debt at just 46% of assets and the highest credit rating in the midstream energy space. Since the IPO in July of 1998, the stock has returned over 1800% compared to just 296% for the S&P 500 over the same period. And that's despite the fact that the stock is selling 30% below the 2014 high. Yet over that five-year period earnings have grown by an average of over 11% per year, and the stock is selling close to the lowest valuations in its history. Then there's the dividend. EPD currently yields a whopping 6.3% on a dividend that is rock solid. It's solid because the company has an industry high 1.7 times distribution coverage. It has also raised the payout every year for more than twenty years in good times and bad. This is a dirt cheap stock with great value that should move higher at some point. In the meantime, you get over 6% to wait on a stock with limited downside. Click here for access to MoneyShow's 100+ page Top Picks Report featuring the nation's most respected and well-known newsletter advisors favorite investment ideas for 2020.

The 6 Best Energy Stocks to Buy Now

These names are poised to benefit from both longer-term sector trends as well as near-term geopolitical tensions.

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