Why should I invest in energy stocks now? Well, if you’ve been living under a rock for the past seven months or so, I have some news for you: energy prices are high. And they are about to get higher.
After removing an energy price cap in April, the UK’s energy regulator Ofgem is increasing the price cap by a further 32% in October, meaning consumers can expect bills to be up by 65% on average.
So, what’s behind these sky-high prices? A lot of it is down to supply-and-demand dynamics on the wholesale market. Rising global demand is being met with diminishing supply, particularly after the West’s embargo on Russian energy products as the war in Ukraine continues.
This high-price environment means that there’s a lot of cash sloshing about in the sector, which can be leveraged by smart investment. Here are three energy stocks that could yield strong returns.
This global energy heavyweight should be familiar with investors. Currently occupying third place in the FTSE 100 by market cap, BP (LSE:BP) still makes the majority of its earnings through fossil fuels. Therefore its share price is usually closely linked to oil and gas prices.
After piggybacking on the rising price of oil up until June, BP’s share price has retreated to 373p, which could provide an entry point for me to take advantage of the company’s dividend.
Thanks to a strong earnings performance over the last 12 months, BP has paid out more than $4bn in cash to shareholders, and its projected dividend payout for 2022 is 18.6p. However, this is only a forecast and could be downgraded should oil and gas prices continue on the downward trajectory of recent weeks.
British Gas owner Centrica is also benefitting from the high energy prices. The company’s stock is up 18% in the year to date, and it is on course to deliver revenue over $20bn and earnings of 7.28p this year, according to analysts.
This bodes well for the company’s prospects as an investment opportunity. Currently at 87p, Centrica stock looks decent value given its healthy financial outlook and the fact that Barclays analysts set a price target of 112p in April.
Potential headwinds for Centrica in the coming months include commodity price volatility, wider economic uncertainty and supply chain disruption. The group expects these will offset underlying operational progress in the near term.
Greencoat UK Wind
As soaring summer temperatures remind us of the dangers of climate change, renewable energy stocks will certainly come to the fore in discussions on energy investments.
Greencoat UK Wind is one such stock, which operates 43 onshore and offshore wind farms, with a combined generation capacity of more than 1.4 gigawatts. A revenue increase of 172.5% to 423.47mn and a 5% dividend last year demonstrates a strong basis for further growth.
However, the company’s upcoming profits could be impacted by a mooted windfall tax on all electricity generators in the UK. This kind of speculation has hit Greencoat’s share price in the recent past, although I still believe this is a solid future-facing investment.
Jacob Ambrose Willson has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and Greencoat UK Wind. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2022