Amid escalating geopolitical tensions and uncertainty over global demand, the energy sector has witnessed notable turbulence in recent months. However, crude futures for April delivery (CLJ24) rallied 3.8% this week, hitting new 2024 highs after an IEA report highlighted rising demand and potential supply deficits in 2024 due to OPEC+ cuts, Ukrainian drone attacks on Russian refineries, Red Sea ship incidents, and expectations of Federal Reserve rate cuts, which have historically bolstered demand.
Perhaps even more compelling for energy investors this month is the news that Brazilian state-run oil company Petroleo Brasileiro S.A. (PBR) came up short on 2023 dividends. This news spilled beyond Petrobras, causing a significant downturn in the broader Brazilian stock market, as the oil major accounts for 13% of the benchmark Ibovespa index.
In response, analysts downgraded Petrobras - but as crude futures surge, there are still plenty of high-quality energy stocks offering robust dividend yields. Against this backdrop, let's examine three energy stocks that Wall Street analysts favor over Petrobras. These stocks have significant upside potential to complement their attractive dividend yields.
Energy Dividend Stock #1: Energy Transfer LP (ET)
Texas-based Energy Transfer LP (ET) is engaged in the pipeline transportation and storage of natural gas (NGJ24), crude oil, natural gas liquids (NGLs), refined products, and liquid natural gas (LNG). The company is one of the largest and most diversified midstream energy companies in North America, with over 125,000 miles of pipelines and associated energy infrastructure in 44 states. Its market cap currently stands at $50.67 billion.
Energy Transfer stock is up 10.7% on a YTD basis, outperforming the S&P 500 Index’s ($SPX) and S&P 500 Energy Sector SPDR’s (XLE) 7.4% and 9.2% respective gains over this time frame. Plus, with company insiders picking up the shares at a healthy pace, the stock could have more upside in the future.
The stock currently trades at 9.68 times forward earnings and 0.58 times forward sales, lower than the oil and gas storage and transportation industry averages of 11x and 1.41x, respectively.
Energy Transfer has maintained a consistent dividend payment record since 2006. On Feb. 20, ET paid a quarterly dividend of $0.315 per share, which is an increase of 3.3% compared to the fourth quarter of 2022. Its annualized dividend of $1.26 per share offers a healthy dividend yield of 8.25%. As a limited partnership, ET pays out most of its cash flow as dividends, and is targeting an annual distribution growth rate of 3% to 5%.
The company boasts a diverse energy asset portfolio across various locations, ensuring robust and balanced earnings. Its Lake Charles LNG Terminal strengthens its global LNG presence and enhances Energy Transfer’s overall performance. With a higher proportion of fee-based cash flows, Energy Transfer minimizes commodity price risks and bolsters earnings stability.
Energy Transfer’s merger with Crestwood Equity Partners LP in November 2023 solidified its midstream sector dominance. This immediately beneficial transaction adds substantial cash flows from firm and long-term contracts, enhancing distributable cash flow per unit.
As of Dec. 31, 2023, the company’s adjusted EBITDA and distributable cash flow increased to $13.7 billion and $7.6 billion, respectively. Energy Transfer expects its 2024 adjusted EBITDA to range between $14.5 billion and $14.8 billion, with the midpoint representing about a 7% increase from the year-ago adjusted EBITDA of $13.7 billion. With the potential for further growth and improvement, Energy Transfer is well-positioned to maintain reliable earnings and dividend distributions.
Energy Transfer stock has a consensus “Strong Buy” rating. Out of the 15 analysts offering recommendations for the stock, 13 rate it “Strong Buy,” one has a “Moderate Buy," and one advises a “Hold.”
The average analyst price target for Energy Transfer is $17.71, indicating a potential upside of 15.9%. However, the high price target of $22, assigned by UBS in February, suggests that the stock could rally as much as 43.9% from current levels.
Energy Dividend Stock #2: Shell Plc (SHEL)
Established in 1907, London-based Shell Plc (SHEL) is an energy and petrochemical company that operates via segments including Integrated Gas, Upstream, Marketing, Chemicals and Products, Renewables, and Energy Solutions. With a market cap of $214.5 billion, Shell explores, extracts, markets, and transports crude oil, natural gas, and natural gas liquids.
Shell stock gained 18.4% over the past 52 weeks, right in line with the XLE over this time frame.
The stock currently trades at 8.04 times forward earnings and 0.65 times forward sales - both lower than the integrated oil and gas industry averages of 11x and 1.41x, respectively.
Shell, which handed its shareholders $23 billion in payouts last year, just announced an additional $3.5 billion share buyback to be completed by May 2024, over the first quarter of 2024. Additionally, SHEL raised its quarterly dividend 4% to $0.344 per share. The company pays an annual dividend of $2.59 per share, which yields 3.93%.
The dividend hike came amid Shell’s expectation-beating Q4 results, as the oil major posted $7.3 billion in adjusted earnings, or $1.11 per share. Its cash flow from operations (CFFO) for fiscal 2023 amounted to $54 billion, which resulted in total shareholder distributions of 42% of CFFO last year. Shell aims for a 4% annual dividend per share growth, distributing 30% to 40% of its CFFO through dividends and share buybacks.
Shell stock has a consensus “Strong Buy” rating. Out of the 11 analysts offering recommendations for the stock, eight analysts recommend it as a “Strong Buy,” and three gave a “Hold” rating.
The average analyst price target for Shell is $75.05, indicating a potential upside of 14.2%. However, the high price target of $85, assigned by Goldman Sachs in February, suggests that the stock could rally as much as 29.4% from current levels.
Energy Dividend Stock #3: Baker Hughes Company (BKR)
Housten-based Baker Hughes Company (BKR) is a leading global oilfield service provider, offering integrated products and digital solutions for the oil and gas, LNG, and renewable energy sectors. Its market cap currently stands at $31.78 billion.
Baker Hughes stock rose 20.6% over the past 52 weeks, outperforming the broader XLE over this period.
The stock currently trades at 1.24 times forward sales, lower than the oil and gas equipment and services industry average of 1.41x.
In 2023, Baker Hughes returned over $1.3 billion to shareholders, representing 65% of free cash flow, with nearly $800 million of that in dividends. Additionally, it repurchased $538 million of its shares in 2023, including $320 million in the fourth quarter.
Baker Hughes has consistently paid dividends since 1989. It recently increased its quarterly cash dividend to $0.21, reflecting an increase of 5% sequentially and 11% annually. The company pays a yearly dividend of $0.84 per share, which yields 2.65%.
Over the past three years, Baker Hughes has raised its dividend by an average of 3.6% annually. By maintaining a dividend payout ratio of 48.4%, the company manages to strike an equilibrium; it not only rewards its shareholders, but also retains sufficient capital for reinvestment in expansion.
The company has been delivering strong growth and profitability, as evidenced by its Q4 adjusted net income of $511 million, or $0.51 per share, which surpassed the consensus estimate of $0.47. Plus, Baker Hughes prioritizes dividend growth, bolstered by ongoing margin enhancement and a strong surge in industrial and energy technology orders.
In 2023, Baker Hughes generated over $2 billion of free cash flow, resulting in a conversion rate of 54% from adjusted EBITDA, which was above the high end of its expected range. In 2024, it anticipates free cash flow conversion of 45% to 50%, and expects to achieve over 50% conversion rates in the longer term.
Baker Hughes stock has a consensus “Strong Buy” rating. Out of the 21 analysts offering recommendations for the stock, 16 rate it “Strong Buy,” two have a “Moderate Buy," and three advise a “Hold.”
The average analyst price target for Baker Hughes is $41.07, indicating a potential upside of 26.2%. However, the high price target of $49 suggests that the stock could rally as much as 51.2% from current levels.
