No question about it: Oil prices took a tumble at the beginning of the pandemic. However, last year, plenty of life breathed into the energy sector. Energy jogged to first place of all the sectors in the first half of 2021. In fact, oil prices reached their highest levels in six years.
But what about market dynamics in the coming year? After all, technological development, regulations, consumer preferences and investor sentiments have all caused the energy sector to shift.
What can you expect from the energy sector, what actually makes up the energy sector and what to invest in? Full speed ahead, but a major hint: Analysts have overwhelmingly screamed "Buy!" for the sector in general.
What is the Energy Sector?
The energy sector relates to producing or supplying energy. Companies and processes involved include the fossil fuel industry, which include petroleum industries, coal industries and natural gas industries, as well as the electrical power industry, nuclear power industry and the renewable energy industry. Let's take a quick look at each area.
Petroleum, Coal and Natural Gas
Let's walk through these three areas — after all, you shouldn't invest in what you don't understand! (Advice directly from Warren Buffett.)
- Oil and gas drilling: Drilling for oil and gas depends on the material, the size of the hole and how deep to drill. Experts must drill a hole through various rocks, materials and layers to reach it and consider the geology and potential subsurface structure as well as the optimal drilling rig to make it happen. Petroleum refineries then change crude oil into petroleum products for transportation, heating, paving roads and generating electricity which are reconfigured into new products. Petroleum refineries break crude oil using three steps: separation, conversion and treatment.
- Coal extraction and processing: Coal miners use two primary ways to extract coal: surface mining and underground mining. In surface mining, large machines remove the topsoil and layers of rock to expose coal seams. Underground mining occurs when coal exists underground.
- Natural gas extraction: A large piece of drilling equipment drills through soil and rocks to reach natural gas deposits.
All three of these areas also involve distribution and sales, as well as a whole host of other functions within the industry.
- Electrical power industry: Within the electrical power industry, three main areas are hard at work, including electricity generation, electricity transmission, electric power distribution and the sale of electric power.
- Nuclear power industry: use of nuclear reactions to produce electricity. Nuclear power can be obtained from nuclear fission, nuclear decay and nuclear fusion reactions. Plants typically use uranium and plutonium.
- Renewable energy industry: The renewable energy industry typically involves alternative energy and sustainable energy companies, including hydroelectric, wind and solar. It also concerns itself with alternative fuels — specifically, the manufacture, distribution and sale.
Top Energy Stocks for 2022
Now for the fun part. Which companies are poised to make headlines in 2022? Let's find out.
Magnolia Oil and Gas Corp., headquartered in Austin, Texas, explores and produces oil and gas in the Eagle Ford Shale and Austin Chalk formations in South Texas. The company prides itself on generating significant free cash flow after capital expenditures, organic production growth, high operating margins, a conservative leverage profile and reinvestment of cash flow.
A fairly new company (Magnolia was founded in 2018), it reported third quarter 2021 net income attributable to Class A Common Stock of $119.4 million — $0.67 per diluted share. Q3 net income $159.9 million and adjusted net income was $157.9 million — $0.67 per diluted share. Net cash provided by operating activities was $221.9 million during the third quarter and free cash flow of $143.5 million.
The company had cash to the tune of $245 million on its balance sheet in Q3 and is undrawn on its $450 million revolving credit facility, with no debt maturities until 2026. Even better, it has no plans to up its debt levels.
Its clear path forward and burgeoning business means Magnolia Oil and Gas Corp. could ramp up the excitement level in your portfolio.
EOG Resources Inc., headquartered in Houston, Texas, explores, develops, produces and markets crude oil and natural gas. The company operates through the United States, Trinidad and Tobago and in other international segments. It has introduced a "Double Premium" drilling model, which means it can tap thousands of drilling locations and produce more output that lasts longer.
EOG Resources generated $1.6 billion of free cash flow in 2020, which both paid the dividend and rectified its balance sheet, even though oil prices averaged less than $40 per barrel, according to the company's website.
For dividend investors: The company also increased regular dividend 82% to an indicated annual rate of $3 per share in Q3 2021 and declared a special dividend of $2 per share.
The company earned an adjusted net income of $1.3 billion, or $2.16 per share, and generated $1.4 billion of free cash flow.
The company's strong earnings and free cash flow as well as extended track record of reliable execution and savvy capital expenditures, operating costs and product prices may make EOG resources a gem for your portfolio.
You don't have to look any further than the Energy Select Sector ETF fund, an ETF that tracks an index of energy companies in the S&P 500, to see the success of the energy industry. As the ETF throws large energy companies into the mix from various sectors within the sector, you can enjoy wide exposure and a diversified reach.
The Energy Select Sector ETF invests in some giants: ExxonMobil NYSE: XOM, Chevron NYSE: CVX, ConocoPhillips NYSE: COP, EOG Resources NYSE: EOG and Schlumberger Ltd NYSE: SLB.
With a market capitalization of $31.97 billion and current rocketing success, it's worth your while to consider this monster instead of trying your hand at stock picking.
Ready to Buy Energy?
Only time will tell how many surprises the energy industry has in store for us in 2022. However, who wants to mess with a good thing, especially since energy investors have had precious little to celebrate over the past few years? Get 'em while they're hot!
Before you consider Magnolia Oil & Gas, you'll want to hear this.
MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Magnolia Oil & Gas wasn't on the list.
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