Better Buy Now: Oil & Gas Stocks or Renewables?

Jhe seemingly unstoppable rally in oil prices over the past year has made it harder for energy investors to choose between oil and gas stocks and renewable energy stocks. Although it’s hard to predict how far oil prices may go, the world is still running on fossil fuels, so much so that demand for oil is expected to outstrip supply for years to come.

Yet this is not going to hold back the shift to cleaner fuels, and there is no denying that renewables have enormous growth potential as they change the dynamics of the energy sector. If you were to invest in energy today, what would be your best bet: oil and gas or renewable energy? Here is the case for both sides to help you decide.

Renewable energy is the way forward

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 match market returns – or exceed them – then for most investors it doesn’t make sense.

Simply put, if you bought oil stocks years ago and they are paying good dividends, you can keep them. No need to panic, because the demand for oil does not vaporize overnight.

However, if you are looking to buy something today, oil stocks may not be the best option. Oil and gas stocks can be good buys when they are down, as can oil prices. This is currently not the case.

Image source: Getty Images.

Oil and gas stocks have not generated attractive returns this decade. the iShares Global Clean Energy ETF (NASDAQ: ICLN) increased by 92% in three years and by 112% in five years. By comparison, the Energy Select Sector SPDR ETF (NYSEMKT:XLE) increased by 3% in three years, decreased by 5% in five years and by 8% in 10 years. The SPDR Energy Select Sector ETF outperformed ICLN over a one-year period, but those gains were not enough to help it outperform over longer periods.

There are a few reasons to prefer renewable energy stocks on oil stocks. For starters, the golden age of the shale boom, when oil companies generated billions of dollars in profits, is largely over. The demand for oil and gas could grow much more slowly than in the past, due to the growth of renewable energy sources.

The transport sector is a major oil consumer. The increased adoption of battery-powered and hydrogen-powered electric vehicles could lead to a stabilization or even a decline in oil demand for this sector.

Similarly, the use of renewable energy is also expected to increase in the power generation sector. The US Energy Information Administration predicts that the share of renewables in electricity generation in the United States could double, from 21% in 2020 to 42% in 2050. Falling electricity generation costs from renewable energy sources contributes to the growth of the use of renewable energy in this sector. .

Even if you are looking for stable dividend income, you can still find several good options in the field of renewable energy utilities. Overall, renewable energy stocks are a much better bet than oil and gas stocks for generating attractive long-term returns.

There’s still plenty of money to be made in oil and gas

Neha Chamaria (Oil and Gas): Betting on oil and gas stocks can now seem risky, given the cyclicality of the industry and the global transition to renewable energy. However, it could take decades to replace oil and gas, and it may never fully happen.

Even if all nations met their climate change commitments so far by 2050, the world would still consume 75 million barrels of oil a day, according to the International Energy Agency ( OUCH). This is about 25% less than current global consumption, but even this decline will only occur I fall global climate change commitments are met on time. It’s a bigger if than one might think.

In short, oil and gas stocks still have plenty of steam, provided you know which stocks to pick.

Workers on an oil field at sunset.

Image source: Getty Images.

In an environment of rising oil prices, oil and gas exploration and production companies can make a lot of money. They can use that money not only to grow, but also to reward shareholders, while preserving cash for tougher times.

These nimble and proactive companies will not just survive, but thrive, more so if they also adapt to industry changes and invest accordingly. For shareholders, all of this could eventually mean big returns.

Conoco Phillips (NYSE:COP), for example, wants to return at least 30% of cash flow to shareholders in 2022, as it prioritizes dividend growth while maintaining a strong balance sheet. With oil prices soaring, ConocoPhillips could pay out a fairly large dividend this year, even as it continues to seek opportunities in renewable energy for a secure future.

Then there are companies that have indexed 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, compared to just $0.68 per share in 2020. At West Texas Intermediate (WTI) crude of $75 per barrel, Devon Energy forecast a 35% growth in cash flow this year. That now looks like a conservative estimate, given that WTI is above $100 a barrel at the time of this writing.

If you’re still wary of the risks of investing in oil and gas, but still want exposure, you have top midstream companies that pay regular dividends regardless of the price of oil. Dividends can make a huge difference in oil and gas.

EPD table

DEP given by Y charts.

Enterprise Product Partners (NYSE:EPD) generated enough distributable cash flow to cover dividends during the oil recession in 2020. As oil production plummeted, Enterprise Products continued to store, process and transport oil and gas products through its extensive network of pipelines in under its long-term tariffed contracts. The company is now make a big move for growth by acquiring Navitas Midstream Partners for $3.25 billion in cash in a transaction that is expected to be immediately cash flow accretive from 2023, and its stock is currently yielding 7.8%.

What I mean is that it is myopic to view all oil and gas stocks as risky investments just because the world is moving towards renewable energy. Oil and gas is and will remain an essential industry, so don’t ignore it for now.

Who wins this battle?

Going all out in oil and gas stocks just because oil prices are rising may not be a wise move. At the same time, buying a stock just because it’s in renewables could be an even riskier bet.

The key to successful energy investment at a time when the sector is undergoing profound change is to strike a balance. You might be better served if you add a mixture of oil and gas and renewable energy stocks to your portfolio. By doing so, you could also earn passive income, considering how most energy companies have done large dividends in recent years.

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Neha Chamaria has no position in the stocks mentioned. Rekha Khandelwal has no position in the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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