The energy industry has been a challenging sector for investors in recent years. Not only have oil prices been excruciatingly volatile, but the industry is also undergoing a structural shift away from fossil fuels and toward renewables. These issues have caused most energy stocks to underperform, which led many investors to avoid the sector entirely.
But while the energy industry certainly has its share of problems, it also has plenty of opportunities as it addresses its issues. Because of that, pockets of upside exist. Three of our energy-focused contributors' favorite investing ideas are pipeline giant Energy Transfer (ET 0.10%), wind turbine maker Vestas Wind Systems (VWDRY -1.30%), and oil reservoir specialist Core Laboratories (CLB).
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An absurdly cheap pipeline stock
Matt DiLallo(Energy Transfer): Midstream giant Energy Transfer has invested billions of dollars into expanding its pipeline empire in recent years. Those investments continue to pay big dividends for the company. That's evident in its 2019 forecast. The company currently expects to generate between $10.8 billion and $11 billion of earnings this year, about 15% ahead of last year's total at the midpoint.
With Energy Transfer's enterprise value currently around $91 billion, the pipeline behemoth trades at less than nine times estimated earnings for 2019. That's a ridiculously cheap price. It's by far the lowest in its peer group where the average stock trades at around 11.5 times earnings.
This bottom-of-the-barrel valuation makes no sense. For starters, Energy Transfer is growing at a healthy pace. On top of that, it has a much-improved financial profile. It's currently producing twice the amount of cash needed to cover its 8.9%-yielding dividend. That's providing it with plenty of excess money to help finance expansion projects. Further, while its leverage ratio is a bit above its target range, the company expects that to improve once its current slate of expansions begins generating cash.
Add Energy Transfer's dividend to its upside potential as its earnings grow and valuation improves, and this pipeline stock could produce big-time total returns in the coming years. That makes it one of the more compelling energy stocks to buy these days.
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The winds are in this pure play's favor
Jason Hall (Vestas Wind Systems): Oil and gas continue to dominate much of the way the world is powered. And when it comes to renewables, most people -- and most headlines -- focus on solar. And as much as solar will play a big role in powering the future, wind turbines deliver some of the cheapest and most-reliable energy -- not just renewable energy -- in the world.
Vestas, one of the biggest wind turbine manufacturers and service providers in the world, is a rare pure-play investment you can make on the growth of wind. According to the World Wind Energy Association, global wind power capacity approached 600 gigawatts in 2018, with more than 50 megawatts having been deployed -- nearly 10% average yearly growth -- in each of the past two years. In the U.S. alone, wind power has more than tripled over the past decade.
Yet even with such big growth, wind generates only about 6% of global energy needs. But that is steadily changing, as spending to deploy wind turbines, on average, is expected to continue getting a bigger and bigger share of the global energy investment wallet.
Why now? Even with its stock price up 16% this year and its earnings down over the past couple of years due to the investment cycle in turbines, Vestas is set for a very profitable future. The company has a combined wind turbine and services agreements backlog of more than 28 billion euros through last quarter, and demand for turbines continues to grow.
No portfolio is complete without exposure to wind, and Vestas is a leader in the space that's worth owning for the long term.
Still generating solid returns in a tough industry
Tyler Crowe (Core Laboratories): It's understandable why investors have sold off Core Laboratories over the past several years. Being in the oil services business over the past few years has been awful for the bottom line and one can only listen to management predict a "v-shaped recovery" for so long before wondering if management is full of baloney. Despite these sore spots and Core Labs' stock declining 72% (!) over the past year, there are some reasons to think that investing in the company today looks like a decent value proposition.
One thing that Core has going for it over so many of its oil services peers is that it is an incredibly asset-light business. Not having fleets of equipment means that the company can ramp up or wind down its business with few capital requirements and avoid the pitfall of making poor investments just to keep the lights on. That's how the company has been able to maintain a double-digit return on capital employed throughout this entire oil market swoon and maintain a dividend that at today's price makes for a generous yield of 4.75%.
CLB Return on Capital Employed (TTM) data by YCharts.
As for a recovery in the oil and gas market, you have to give management some leeway. It, like most investors, assumed that executive teams at shale oil and gas producers knew how to read a cash flow statement. It's also reasonable to think that there will be a wave of oil and gas spending in the coming years to recompense for a half-decade of underinvestment.
One could certainly argue that Core Labs' stock was overvalued back in the days of $100 oil and that a large decline was justified. At the same time, though, this is a company that produced double-digit returns in some of the oil and gas industry's darkest years. You won't find many businesses that can perform that well while trading at 18 times earnings and such a generous dividend yield.
