Energy stocks, while volatile, can provide a good balance of growth, income, and diversification opportunities. Many energy companies have a long history of consistent dividend payouts, which makes them appealing to income-oriented investors.
Furthermore, energy is a necessary component of economic activity, ensuring long-term demand and making energy companies attractive growth stocks. Here are two such energy stocks that Wall Street is very bullish on.
#1. Frontline
Frontline (FRO) is a shipping company that focuses on the transportation of crude oil (CLF25) and refined petroleum products. Frontline's fleet and operational scale position it as a key player in global energy logistics, facilitating the transportation of essential commodities across oceans.
So far this year, Frontline stock has fallen 9.5%, compared to the S&P 500 Index’s ($SPX) gain of 26%.
Frontline maintains a fleet of vessels that includes Very Large Crude Carriers (VLCCs), Suezmax tankers, and Aframax tankers. These ships are designed to transport crude oil efficiently over long distances. The company's revenue is primarily derived from spot market earnings (revenue from voyages booked on a per-trip basis) and time-charter contracts (contracts under which vessels are leased out for a set period). While spot earnings are volatile and heavily reliant on supply-demand dynamics in the shipping market, time-charter contracts provide a more consistent income.
In the second quarter, total revenue of $556 million increased 8.4% year on year. Adjusted earnings per share fell to $0.62, from $0.94 in Q2 2023. Management stated that seasonality has a significant impact on the tanker markets and that the summer is the company's slowest period.
The company freed up capital in the second and third quarters to pay off its total debt of $670 million. It also refinanced 10 Suezmax tankers through a sale-and-leaseback agreement, which is expected to generate $101 million in net proceeds. This will allow the company to repay the remaining $75 million under the $275 million senior unsecured revolving credit facility.
Frontline is a dividend stock, paying an attractive 13% yield. However, its high payout ratio of 81.1% raises concerns about the dividend's sustainability.
Frontline will release its third-quarter earnings results on Nov. 27 after the market closes. Analysts expect the company to report $317.6 million in revenue and a profit of $0.38 per share, up from $0.36 in the year-ago quarter.
Analysts predict 25% revenue growth in 2024, but earnings may fall by 9.9%. In 2025, however, revenue and earnings are expected to rise by 14.8% and 26.4%, respectively. Frontline, valued at two times forward sales, is an affordable energy dividend stock to buy right now. However, as with all energy stocks, Frontline is risky.
Emerging markets, particularly in Asia, are fueling global oil demand. This trend contributes to long-term demand for crude oil transportation. For investors who can tolerate volatility, Frontline provides a unique opportunity to participate in the ever-changing energy and shipping sectors.
Overall, FRO stock is a “strong buy” on Wall Street, according to all five analysts in coverage. Based on its average target price of $31.18, the stock has an upside potential of 72.6% from current levels. Its high target price of $37 implies a 104.7% potential increase over the next 12 months.
#2. Civitas Resources
Civitas Resources (CIVI) is a domestic oil and natural gas producer operating in the Denver-Julesburg (DJ) and Permian basins. Civitas stock has dipped 25.8% year-to-date, compared to the broader market's gain.
Civitas generates a mix of oil, natural gas (NGZ24), and natural gas liquids (NGLs), ensuring a diverse revenue stream. In the third quarter, crude oil accounted for 87% of total revenue. The company generated $1.27 billion in total operating revenue, a 23.3% increase year over year. Diluted earnings also increased by 93% to $3.01 per share.
The company is committed to a balanced approach that combines energy production with sustainability practices. Civitas Resources is praised for its shareholder-friendly capital return strategy. In addition to regular dividends, Civitas pays variable dividends tied to its free cash flow, which appeals to income investors.
In the third quarter, adjusted free cash flow totaled $366.3 million. After paying its quarterly base dividend of $0.50 per share, the company used 50% of its free cash flow for share buybacks and/or variable dividends. It devotes the remaining 50% to its balance sheet. Civitas paid out $227 million in dividends and share repurchases during the quarter.
The company's forward dividend yield is 3.85%, compared to the energy sector average of 4.24%. Furthermore, its forward dividend payout ratio of 21.8% is low, implying plenty of room for dividend growth.
Furthermore, Civitas has a strong balance sheet and low leverage. Its conservative approach to debt management provides financial flexibility, allowing it to weather industry downturns and capitalize on growth opportunities. CIVI reduced its debt by $88 million in the quarter, leaving it with $47 million in cash, cash equivalents, and restricted cash.
Analysts predict a dip in Civitas earnings in 2024, followed by a 5.02% increase in 2025. Civitas Resources, trading at five times forward 2025 earnings, appears cheap right now.
Overall, CIVI stock is a “strong buy” on Wall Street. Of the 14 analysts who cover CIVI, 12 recommend it as a "strong buy," one as a "moderate buy," and one suggests a "hold.”
The mean price target for Civitas is $77, which is 51.7% higher than current levels. Its high target price of $106 indicates an upside of 108.9% over the next 12 months.
Civitas is well-positioned to benefit even amid low oil prices, as geopolitical factors and demand-supply dynamics drive energy markets. Its high profitability, shareholder-friendly policies, and undervaluation make it an appealing choice, particularly for income and value investors.
