Energy stocks are having a solid year. The average one in the S&P 500 was up 14% heading into the year's final month. While that has underperformed the S&P 500, it's a solid showing, considering that oil and gas prices have been weaker this year.
Energy demand should continue growing in 2025 and beyond. This means several energy stocks still look like compelling long-term investments as we close out 2024. Black Hills (BKH -0.73%), Western Midstream Partners (WES 0.28%), and Brookfield Renewable (BEP -0.26%) (BEPC -0.70%) stand out to a few Fool.com contributors as great ones to buy before we head into the new year.
Black Hills is a sleeper
Reuben Gregg Brewer (Black Hills): When it comes to boring stocks, utilities like Black Hills normally score high on the snooze list. This particular regulated natural gas and electric utility serves 1.3 million customers in parts of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. Providing reliable energy is basically all it does, but it does it pretty well.
That's highlighted by the fact that Black Hills has increased its dividend annually for 54 consecutive years (and paid one for 82 consecutive years). Talk about consistency! And, it is worth noting that the 54 years is enough to get Black Hills onto the highly elite list of Dividend Kings.
Looking forward, the streak is likely to continue, given the company's investment-grade-rated balance sheet and $4.3 billion in capital spending plans.Basically, it has the wherewithal to support its growth plans. The best part, however, is that the investment plans are really normal for a utility, including things like system modernization and integrity efforts and capacity developments to keep up with growing demand (and to clean up older generating capacity). Those are the types of mundane things regulators like to see.
Now for the exciting part of the story. You get all of that boring, sleep-well-at-night goodness and a historically high 4% dividend yield. For reference, the S&P 500 is only yielding 1.2%, and the average utility yields about 2.8%. Wait, a reliable dividend stock with a high yield -- maybe Black Hills isn't that boring after all!
A solid base to produce strong returns in 2025 and beyond
Matt DiLallo (Western Midstream Partners): Western Midstream Partners is having a strong year. The master limited partnership (MLP) is on track to grow its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to $2.3 billion, an 11% increase compared to last year. Meanwhile, its free cash flow is on pace to grow 19% to nearly $1.2 billion.
The company has benefited from last year's acquisition of Meritage Midstream and its organic growth drivers. This growth, along with some noncore assets sales, has helped drive down its leverage ratio to 3.0 times, a 0.7x improvement from the end of last year.
The MLP's growing free cash flow and financial flexibility have enabled it to significantly increase its cash returns. It has raised its quarterly distribution rate to $0.875 per unit ($3.50 annualized). That's a 52% increase from the prior level. Western Midstream currently offers a more than 9% yield.
That big-time yield will provide investors with a strong base return in 2025. Meanwhile, the MLP has the fuel to continue growing its earnings and cash flow in the future. It's spending $700 million to $850 million on capital projects this year, which should enhance its ability to grow its cash flow.
The company also has tremendous financial flexibility to make additional accretive acquisitions like Meritage as opportunities arise. It can also opportunistically repurchase its units to further enhance value for investors. These catalysts should allow it to continue increasing its high-yielding distribution.
With a high yield and healthy financial profile, Western Midstream is an excellent option for those comfortable investing in an MLP that sends a Schedule K-1 federal tax form each year. It can provide investors with significant tax advantages in the coming years.
Poised for growth
Neha Chamaria (Brookfield Renewable): Brookfield Renewable is on track to deliver a record year, with its funds from operations (FFO) per unit growing by 7% during the nine months ended Sept. 30. With the company's FFO per unit growing by 11% in the third quarter, management believes it should be able to meet its targeted 10%-plus FFO per-unit growth in 2024.
The real deal is how Brookfield Renewable is finding opportunities to grow its FFO in an otherwise challenging market. Although the company generates earnings from renewable assets it owns and operates, it also sells mature assets periodically to fund its growth.
On its third-quarter earnings call, management said that 2024 will be its "most successful year for asset recycling ever," what with the company generating record proceeds worth nearly $2.3 billion from asset sales in the year through Sept. 30. Since asset recycling is a significant source of funds for the company, 2024 will also be Brookfield's "largest year for investments into growth."
Brookfield Renewable is already one of the largest clean energy companies in the world. With management targeting investments worth nearly $8 billion to $9 billion over the next five years, at least 10% annual FFO per unit growth, and 5% to 9% annual dividend growth, I believe this is one energy stock you'd want to buy as we step into 2025.
