The Federal Reserve's decision to slash interest rates by a sizable 50 basis points on Sept. 18 marks a significant shift in monetary policy, as the Fed looks to pivot from the fight against inflation toward supporting the labor market. This jumbo rate cut is expected to have far-reaching implications for various sectors, and particularly the energy industry. Lower borrowing costs are set to benefit capital-intensive exploration and production projects, while lower rates could eventually provide some relief for cash-strapped consumers, potentially giving a boost to energy demand.
Energy stocks have had a mixed year so far, with the Energy Select Sector SPDR Fund (XLE) up just 6.3% year-to-date after a strong start to 2024. However, the Fed's rate cut has injected fresh optimism into the sector - and in a low-rate environment, the attractive dividend yields offered by many energy companies become even more appealing to investors seeking income.
Against this backdrop, three “Strong Buy” energy dividend stocks stand out: Cheniere Energy (LNG), Vistra Corp (VST), and Weatherford International (WFRD). Analysts believe these stocks have significant upside potential following the Fed's jumbo rate cut. Let's explore why these stocks are well-positioned to deliver solid returns in the current macroeconomic landscape.
Cheniere Energy (LNG): Capitalizing on LNG Market Growth
Valued at $41.3 billion, Cheniere Energy Inc (LNG) is a Houston-based energy company primarily focused on liquefied natural gas (LNG)-related businesses. They are the largest producer of LNG in the United States and the second largest LNG operator globally.
LNG stock has gained 6.8% on a YTD basis, and 14% over the past 52 weeks.
Cheniere's forward price/earnings (P/E) ratio is 18.77, which is higher than the sector average of 11.63 - suggesting investors are paying a premium for the company's future earnings growth. However, this valuation is right in line with LNG's historical average valuation, suggesting the stock is reasonably priced right now.
The stock also offers a dividend yield of 0.96%, backed by a modest payout ratio of less than 10%. LNG has paid dividends consistently since 2021.
In its Q2 2024 earnings report, Cheniere exceeded expectations with an adjusted profit of $3.84 per share, significantly outperforming the $1.74 estimate. However, revenue fell short at $3.3 billion, missing the $3.4 billion forecast. Despite this mixed performance, the company raised its full-year 2024 guidance for consolidated adjusted EBITDA to $5.7-$6.1 billion and distributable cash flow to $3.1-$3.5 billion, signaling confidence in its future prospects. They are set to report Q3 2024 earnings in early November, with analysts forecasting EPS of $1.87, on average.
Operationally, Cheniere continues to expand its already impressive capacity. The company currently boasts a total production capacity of approximately 45 million tonnes per annum (mtpa) of LNG in operation, with an additional 10+ mtpa of LNG capacity under construction.
Analysts remain overwhelmingly bullish on Cheniere, with a consensus "Strong Buy" rating. The mean target price of $202.33 suggests a potential upside of about 11% from current levels. With 15 “strong buys,” 2 “moderate buys,” and 1 “hold” recommendation, the market sentiment towards Cheniere remains highly positive.
Vistra Corp (VST): Powering Ahead with Strategic Acquisitions
Vistra Energy Corp (VST) is a leading integrated retail electricity and power generation company, primarily operating in Texas and other competitive power markets across the United States. Known for its diverse energy portfolio, Vistra has been making significant strides in transitioning towards cleaner energy sources while maintaining a strong market presence.
The utility stock has been on a remarkable trajectory, and has now officially muscled out none other than Nvidia (NVDA) as the best-performing S&P 500 Index ($SPX) stock of 2024. VST is up 189.8% so far this year, and the stock has surged 236% over the past 52 weeks.
In Q2 of 2024, despite a slight dip in net income to $467 million, Vistra's ongoing operations adjusted EBITDA jumped to $1.414 million from $1.008 million year-over-year. This robust performance led management to reaffirm its 2024 guidance and increase its 2025 outlook.
Vistra's recent strategic moves have further bolstered investor confidence. On Sept. 18, the company announced a pivotal $3.248 billion acquisition of the remaining 15% equity in Vistra Vision LLC, consolidating its position in zero-carbon energy generation and retail operations.
Looking ahead, Vistra plans to spend at least $2.25 billion on share repurchases throughout 2024 and 2025.
With a dividend yield of 0.81%, Vistra presents an attractive blend of growth and income potential. The company recently increased its quarterly dividend to $0.2175 per share, and Vistra has grown its dividend at a rate of 18% over the past five years.
Analysts are calling for 33% annual EPS growth this fiscal year and next, with VST priced around 20.93x forward adjusted earnings.
Analyst sentiment is overwhelmingly positive, with 9 out of 10 rating VST a “strong buy.” The mean target price of $115.00 suggests about 3% upside from the current price.
Weatherford International (WFRD): Innovating in Oilfield Services
Valued at $7.01 billion, Weatherford International Plc (WFRD) is a leading global provider of innovative solutions for the oil and gas industry, specializing in drilling, evaluation, completion, and production services. The company operates in 75 countries, making it a global leader in artificial lift and tubular running services.
The company's recent initiation of a quarterly dividend of $0.25 per share, yielding 1.04%, adds an income component to its investment profile.
WFRD has underperformed in 2024, losing 1.8% YTD to narrow its 52-week return to just about 6%. However, the stock has rallied about 5% since the Fed's rate cut hit the wires.
In its Q2 2024 earnings report, Weatherford posted revenue of $1.41 billion, up 10% year-over-year, though slightly below analysts' estimates. Earnings per share came in at $1.66, missing expectations by 4.60%. However, adjusted earnings of $1.75 arriving right in line with the consensus estimate.
Operationally, Weatherford continues to excel across its segments. The Drilling and Evaluation segment posted revenues of $427 million in Q2 2024, an 8% increase year-over-year. The Well Construction and Completions segment saw revenues rise by 15% year-over-year to $504 million, while the Production and Intervention segment experienced a modest 1% increase to $369 million.
Weatherford's strategic vision took a significant leap forward on Sept. 3 with the acquisition of Datagration Solutions Inc. This move positions Weatherford at the forefront of data integration, analytics, and machine learning in the oil and gas sector, potentially driving future growth and operational efficiencies.
Looking ahead, analysts are targeting 20% EPS growth this fiscal year and 23.4% growth in fiscal 2025 for WFRD, which is currently valued at around 13x forward adjusted earnings. Wall Street's optimism is reflected in the unanimous "Strong Buy" rating from all 8 analysts covering the stock, with the mean target price of $153.12 suggesting a substantial 59.4% upside potential.
Conclusion
In conclusion, Cheniere Energy (LNG), Vistra Corp (VST), and Weatherford International (WFRD) all present compelling investment opportunities in the wake of the Federal Reserve's rate cut. Each company offers a unique value proposition within the energy sector, from LNG exports to integrated power generation to oilfield services. The lower interest rate environment is likely to benefit these companies through reduced borrowing costs and increased attractiveness of their dividend yields. With the prospect of passive income and compelling valuations, these three “Strong Buy"-rated stocks appear well-positioned to capitalize on industry trends and macroeconomic factors.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
