Energy prices can be excruciating volatile. Oil, for example, has crashed more than 20% twice in the past year. Those price fluctuations can have a significant impact on the earnings of companies with direct exposure to energy prices, which can weigh on the value of their stock.
That volatility -- which can come out of nowhere -- is why I prefer to buy energy stocks that have limited direct exposure to fluctuating prices. Two of my personal favorites are renewable power producer Brookfield Renewable Partners (NYSE: BEP) and midstream MLP Crestwood Equity Partners (NYSE: CEQP). Add the stable cash flow profiles to their upside potential, and I'd buy either one of these energy companies right now.
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A top-tier renewable energy producer
Brookfield Renewable operates one of the largest renewable energy platforms in the world. The company specializes in hydropower, which it compliments with a growing portfolio of wind, solar, and energy storage assets. While power prices tend to ebb and flow with the economy, Brookfield Renewable mutes much of this impact by locking in electricity rates under long-term contracts. For 2019, the company has agreements in place for 87% of its anticipated power output.
Because Brookfield Renewable generates such stable cash flow, it's able to send a significant portion of that money back to investors via a dividend that currently yields 5.4%. While the company has paid out roughly 90% of its cash flow over the last year, it's aiming to get that percentage down to 70%. That will not only improve the long-term sustainability of its payout but also enable it to retain more cash to invest in expansion projects.
Brookfield Renewable currently expects to build 1,000 MW of new renewable energy generating assets over the next five years. Those expansions should help grow its cash flow per share at a 3% to 5% annual pace. The company also sees a combination of cost reduction initiatives and higher power prices as legacy contracts expire adding another 3% to 6% to its bottom line each year. That supports the company's view that it can increase its distribution at a 5% to 9% annual rate. Meanwhile, the company has a knack for making high-value acquisitions -- including two deals already this year -- that should supercharge its growth rate. Add the distribution to its growth potential, and Brookfield Renewable could generate total annual returns in the mid-teens over the next several years.
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A high-octane midstream growth company
Crestwood Equity Partners operates a diverse portfolio of U.S. midstream assets. The company typically secures long-term contracts with customers for capacity on its pipelines and processing plants. For 2019, these agreements will backstop about 84% of the company's anticipated earnings.
Those fixed-fee contracts provide Crestwood with stable cash flow, the majority of which it distributes to investors via a payout that currently yields 6.5%. The company estimates that it will pay out between 60% to 67% of its cash flow this year. The MLP intends on using the money it retains to invest in high-return growth projects.
Crestwood Equity Partners has several expansions currently under construction, including building two new natural gas processing plants and additional gathering pipelines. On top of that, the company recently made a needle-moving acquisition. These growth-related investments have the MLP on track to increase its cash flow at a peer-leading compound annual rate of more than 20% per share through next year. Add that high-octane growth rate to Crestwood's high-yielding distribution, and it could potentially produce total annual returns above 20%.
Excellent energy stocks to buy for the long haul
Brookfield Renewable and Crestwood Equity have taken steps to reduce their exposure to the energy sector's volatility by locking in pricing under long-term contracts. That enables them to generate steadier cash flow, which allows them to pay high-yielding dividends. Meanwhile, they use the cash they retain to help finance expansion projects that grow their cash flows. That combination of growth and income should enable these energy stocks to generate above-average total annual returns. That's why I'd have no problem buying more of either one right now.
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Matthew DiLallo owns shares of Brookfield Renewable Partners L.P. and Crestwood Equity Partners LP. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.