The seemingly unstoppable rally in oil prices over the past year or so has made it harder for energy investors to choose between oil and gas and renewable energy stocks. While it’s hard to predict how far oil prices can rally, the world still runs on fossil fuels, so much so that demand for oil is expected to outstrip supply for years to come.
Yet that’s not going to put the brakes on the shift to cleaner fuels, and there’s no denying that renewable energy has tremendous growth potential as it’s changing the dynamics of the energy sector. If you were to invest in energy today, what could be your best bet — oil and gas or renewable energy? Here’s the case for both sides to help you decide.
Renewable energy is the way to go
Rekha Khandelwal (Renewable energy): Oil and gas stocks have generated handsome returns for investors over several decades. They can still be good investments if you’re looking for stable dividend income. However, if your investment isn’t generating returns that at least are matching market returns — or exceeding them — then for most investors, it doesn’t make sense.
Simply put, if you bought oil stocks years ago and they’re paying good dividends, you can hold onto them. No need to panic, as oil demand isn’t vaporizing overnight.
However, if you’re looking to buy something today, then oil stocks may not be the best option. Oil and gas stocks can be attractive buys when they’re down, along with oil prices. That isn’t the case right now.
Oil and gas stocks haven’t generated attractive returns in this decade. The iShares Global Clean Energy ETF (NASDAQ:ICLN) rose 92% in three years and 112% in five years. By comparison, the Energy Select Sector SPDR ETF (NYSEMKT:XLE) rose 3% in three years, fell 5% in five years, and 8% in 10 years. The Energy Select Sector SPDR ETF outperformed ICLN over a one-year time frame, but those gains weren’t enough to help it outperform over longer time frames.
There are a few reasons for preferring renewable energy stocks over oil stocks. To begin with, the golden days of the shale boom, when oil companies churned billions of dollars in profit, are largely over. The demand for oil and gas may grow much slower than in the past, due to the growth of renewable energy sources.
The transportation sector is a big consumer of oil. Increased adoption of battery electric and hydrogen vehicles may result in the demand for oil stabilizing, and eventually falling, for this sector.
Similarly, the use of renewables is expected to grow in the power-generation sector, too. The U.S. Energy Information Administration projects that the share of renewables in U.S. electricity generation may double from 21% in 2020 to 42% in 2050. Falling costs of power generation from renewable energy sources is contributing to the growth in the use of renewables in this sector.
Even if you’re looking for stable dividend income, you can still find several good options in the renewable energy utilities space. All in all, renewable energy stocks are a far better bet than oil and gas stocks to generate attractive returns in the long term.
There’s still a lot of money to made in oil and gas
Neha Chamaria (Oil and gas): Betting on oil and gas stocks now might seem risky, given the cyclicality of the industry and the global transition to renewable energy. However, it could take decades to displace oil and gas, and that may never happen completely.
Even if all the nations meet the climate-change pledges they’ve made so far by 2050, the world would still consume 75 million barrels of oil per day, according to the International Energy Agency (IEA). That’s down about 25% from present global consumption, but even that drop will happen only if all global climate-change commitments are met on time. It’s a bigger if than one might think.
In short, oil and gas stocks have plenty of steam left, provided you know what stocks to pick.
Source: Getty Image – ENBIn a rising oil-price environment, oil and gas exploration and production companies can make a lot of money. They can use that cash to not just grow, but reward shareholders, while also preserving some money for tougher times.
Such nimble and proactive companies won’t just survive but thrive — more so if they’re also adaptable to the changes in the industry and invest accordingly. For shareholders, all of that could eventually mean big returns.
ConocoPhillips (NYSE:COP), for example, wants to return at least 30% cash flows to shareholders in 2022 as it prioritizes dividend growth while maintaining a strong balance sheet. With oil prices surging, ConocoPhillips could pay out a pretty big dividend this year, even as it continues to pursue opportunities in renewables for a secure future.
Then there are companies that have pegged their dividends to oil prices. They are, therefore, a great way to play the oil boom.
Devon Energy (NYSE:DVN) shareholders, for example, received $1.97 per share in total dividends in 2021, versus only $0.68 per share in 2020. At West Texas Intermediate (WTI) crude of $75 per barrel, Devon Energy projected 35% growth in cash flows this year. That now sounds like a conservative estimate, given that WTI has topped $100 per barrel as of this writing.
If you’re still wary of the risks of investing in oil and gas but want exposure nonetheless, you have top midstream companies that pay steady dividends, regardless of where oil prices are. Dividends can make a huge difference in oil and gas.
Enterprise Products Partners (NYSE:EPD) generated enough distributable cash flow to cover dividends during the oil downturn in 2020. While oil production tumbled, Enterprise Products continued to store, process, and transport oil and gas products through its extensive pipeline network under its long-term fee-based contracts. The company is now making a big growth move by acquiring Navitas Midstream Partners for $3.25 billion in cash in a deal that should be immediately accretive to its cash flows starting 2023, and its stock currently yields a hefty 7.8%.
The point I’m driving home is that it’s myopic to see all oil and gas stocks as risky investments just because the world is shifting to renewable energy. Oil and gas is a critical industry and will remain so, so don’t dismiss it just yet.
Who wins this battle?
Jumping all-in into oil and gas stocks just because oil prices are rising may not be a savvy move. At the same time, buying a stock just because it’s into renewable energy could prove an even riskier bet.
The key to successful investing in energy at a time when the sector is undergoing a massive change is to strike a balance. You might be best served if you add a mix of oil and gas and renewable energy stocks to your portfolio. By doing so, you could also earn passive income, given how most energy companies have been doling out fatter dividends in recent years.
Source: Motley Fool
