This has been an excellent year to invest in energy stocks, although investors started abandoning the sector en masse about a month ago. Despite that, energy is the only sector in the S&P 500 that remains in the green, up about 27% year-to-date as of July 12 as its grip on that distinction slips away slowly.
In this piece, we used TipRanks’ Comparison Tool to evaluate two energy stocks that address the sector from opposite sides—via oil or traditional forms of energy, and through solar power and energy storage.
A deep analysis reveals reasons to be bullish in the near term on both Devon Energy (DVN) and Enphase Energy (ENPH), with a sentiment shift to neutral on Enphase potentially coming earlier than on Devon.
The energy sector traditionally falls into the category of value stocks, so it’s no wonder that it has done so well this year. Additionally, the energy crisis triggered by Russia’s invasion of Ukraine in February gave the sector even more momentum.
Clamor around the energy crisis has died down as of late, but that doesn’t mean the issue isn’t still real. Although oil prices are off their peaks significantly, there are several factors that suggest oil’s momentum isn’t over, despite the temporary setback.
International Energy Agency Executive Director Fatih Birol told attendees at the Sydney Energy Forum that the world has never dealt with an energy crisis like the current one in terms of its complexity and depth. He added that the worst of it hasn’t even happened yet. As a result, it looks like oil producers could enjoy another boost in the near- to medium-term, despite the temporary setback.
On the other hand, there are reasons to invest in green energy companies as well. Aside from several countries’ push to transition to clean energy and Europe’s desire to move away from Russian oil and natural gas, the increasing trend of ESG (environmental, social, governance) investing means many investors are seeking out green energy companies — simply for the purpose of ESG.
Beyond the promising macro factors for both traditional and green energy, there are other factors that make Devon Energy and Enphase Energy look attractive.
Devon Energy (DVN)
Devon Energy is a leading independent oil and natural gas exploration and producing company in the U.S. Although it is less well-known than other energy companies, there is plenty to like. The recent selloff may offer an attractive entry point for investors.
First, current macro factors favor Devon Energy. For example, the G7 nations are close to capping prices on Russian oil. Meanwhile, an unnamed U.S. official wrote that international oil prices could climb higher if the world’s major economies can’t agree on a cap. The capped price would be enough to cover Russia’s marginal production costs and hopefully motivate it to continue exporting oil.
However, the U.S. official added that without a cap, sanctions against Russia will significantly reduce its exports, potentially leading to oil prices of $140 a barrel. Either way, it seems that macro factors are in Devon’s favor, as any decision to move away from Russian energy will mean countries are looking for other sources of oil and natural gas. U.S.-based Devon Energy could fit the bill.
Aside from the positive macro factors, perhaps the most interesting thing about this company is its dividend, which combines a fixed dividend with a variable one. The variable part of the dividend can be as high as 50% of the company’s excess free cash flow.
Devon Energy’s dividend yield has approached 10% this year, although management guided for a yield of 6.2% for FY22. Still, that’s a hefty yield on a company with attractive macro factors and fundamentals. Additionally, Devon has paid a dividend every year for the last three decades, suggesting that investors can expect it to continue.
Turning to Wall Street, Devon Energy has a Moderate Buy consensus rating based on 12 Buy ratings, seven Hold ratings, and zero Sell ratings over the last three months. At $81.58, the average Devon Energy price target implies upside potential of 57.19%.
Enphase Energy (ENPH)
Enphase Energy produces battery energy storage units and micro-inverters for solar panel installations and is working toward manufacturing its own electric vehicle chargers by the end of the year. All three areas are primed for a long runway to growth as the world gradually converts to renewable energy.
One of the most attractive factors for Enphase Energy right now is its push into Europe, which is desperately trying to reduce its dependance on Russian energy. The company said earlier this year that it plans to add manufacturing facilities in Europe to keep up with demand there.
The company beat consensus estimates on revenue and earnings for the first quarter in a continuation of steady growth on both metrics and healthy earnings beats. Enphase’s first-quarter gross margin was healthy at 40%, compared to 39.6% in the previous quarter. Management guided for robust sales between $490 million and $520 million, compared to the then-consensus of $475 million.
The European energy crisis caused by Russia’s invasion of Ukraine is expected to benefit Enphase Energy, and the company was prepared. When reporting their first-quarter earnings results earlier this year, management said they were “tripling down on Europe in terms of spending,” and their efforts are paying off. Europe helped drive a significant portion of the company’s earnings and revenue beats for the first quarter.
Regarding Europe, Enphase management said they expect their momentum in Europe to continue, leading to more than 40% quarter-over-quarter sales growth for the second quarter. The company is already operating in Germany, the Netherlands, Belgium and France and is establishing operations in Spain, Italy and Portugal.
Things look good for Enphase from a macro standpoint as well. Data from the U.S. Energy Information Administration revealed that April marked the first month in which U.S. wind and solar installations generated more electricity than the nation’s nuclear power plants. Overall, renewable energy accounted for nearly 30% of all the electricity generated in the U.S. in April, a record high, and Enphase Energy is clearly benefiting from this growth.
Looking to Wall Street, Enphase Energy has a Moderate Buy consensus rating based on nine Buy ratings, four Hold ratings, and zero Sell ratings over the last three months. At $226.31, the average Enphase Energy price target implies upside potential of 19.15%.
The energy sector has taken a beating recently, dragging Devon Energy down with it. However, Enphase Energy has remained strong, driven by the steady growth of green energy. Despite the temporary setback on oil prices, indicators suggest they will come roaring back in the near term, potentially giving Devon another boost.
Russia’s invasion of Ukraine will likely benefit both Enphase Energy and Devon Energy. Europe has vowed to accelerate its transition to renewable energy, which is boosting Enphase. Meanwhile, the rest of the world is seeking oil and natural gas companies to replace Russia as one of their key suppliers.
Even though the European energy crisis is benefiting both companies, they each have unique attributes that make them look attractive. Devon looks like a strong addition to a dividend portfolio, while Enphase is poised for a long runway of growth amid the increasing market for renewable energy.
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