The energy industry has been challenging to navigate over the past few years. Oil prices have been in a prolonged slump, coal is losing market share fast, and picking winners in the renewable energy industry has been like playing a game of Minesweeper, trying to avoid all the questionable businesses.
There are still plenty of opportunities in this industry, though, so we asked three Motley Fool contributors to each highlight a stock in the energy industry that they see as a great buy right now. Here's why they picked Kinder Morgan (NYSE: KMI), TerraForm Power (NASDAQ: TERP), and Tellurian (NASDAQ: TELL).
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Still time to hop aboard
John Bromels (Kinder Morgan): Kinder Morgan's share price was hammered by the market in 2015, after the company announced it was slashing its dividend. Since then, the stock price has slowly -- very slowly -- begun to recover. In June, for the first time since 2017, the company's share price rose above $21. That's still less than 50% of its 2015 high, but shares seem likely to continue to increase.
A major opportunity for Kinder Morgan, the country's largest natural gas pipeline operator, is the massive boom that the country is experiencing in natural gas right now. Production is outpacing transportation infrastructure, to the point that natural gas prices on the Waha Hub in the red-hot Permian Basin turned negative in April. That's right: Permian producers were pumping so much gas out of the ground that they actually had to pay their own "buyers" to take it away for them.
Luckily, Kinder Morgan has numerous projects in the pipeline (sorry: couldn't resist) to take advantage of this huge supply glut. Once they come on line, Kinder -- which is already churning out massive amounts of free cash flow -- should make even more money. And that's money it can return to shareholders in the form of dividends. Even now, Kinder is yielding about 4%, which means that investors have a nice incentive to buy in today.
High-yield dividends from renewable power that actually look sustainable
Tyler Crowe (TerraForm Power): Lots of renewable power companies touted the ability to pass on high-yielding dividends to shareholders by owning and operating solar and wind facilities. The power source may have been sustainable, but the payouts certainly weren't. The challenge in the renewable power business is not finding growth, it's finding growth with a high rate of return.
The focus on returns is what makes TerraForm Power one of the more appealing investments in the renewable energy space. Various entities within the vast alternative asset empire of Brookfield Asset Management (NYSE: BAM) own 65% of TerraForm Power, and its fingerprints are all over its approach to acquiring and operating power-generating facilities.
Brookfield acquired TerraForm through a complex bankruptcy auction and has since gone to work cleaning up both its operations and finances. It has already increased EBITDA by just over $75 million annually from simple things like new maintenance contracts, and has earned credit rating upgrades thanks to more-prudent management and a well-financed parent organization.
TerraForm's returns probably aren't going to blow you away in any given year. Management is targeting 5% to 8% payout growth annually and could go a year or more without making deals. What you do get, though, is a sustainable-looking dividend in the renewable power industry that will likely be able to grow at this pace for decades. With a current dividend yield of 5.6%, that's a pretty good value proposition.
A risk-reward investment with nine-bagger potential
Jason Hall (Tellurian): One of my top investing picks right now is Tellurian, a company that's little more than a great idea and a business plan. That's why its stock chart has looked like an EKG readout since the beginning of its first full quarter as a public company in April 2017.
Seriously, Tellurian barely has any business operations today, beyond a few million dollars each quarter that it generates from a handful of natural gas wells.
However, it has incredible prospects to become something enormous, under the founder and an executive team who were behind the building of Cheniere Energy (NYSEMKT: LNG). Here's what Cheniere has done for investors over the past decade:
Charif Souki -- who founded Cheniere and then Tellurian after being forced out of Cheniere (a story for another day) -- and co-founder Martin Houston, who was an executive at BG Group for many years, have assembled a top management team to do it again with Tellurian.
As things stand, Tellurian may not be selling much of anything. But it has secured essentially all of the necessary regulatory approvals to build its Driftwood LNG export facility and associated pipeline, and has begun the process of lining up pipeline customers and raising capital to start construction.
Here's what gets me most excited about Tellurian today: You have leadership that's done it before, and expected cash flows once Driftwood is complete that peg its stock at less than 1 times future cash flows. Based on a reasonable multiple of 9 times cash from operations, Tellurian's shares could be worth $72 in five years. They trade for less than $8 today.
Now, the risk: Tellurian is still just a business plan. It must raise billions in capital and sign customers to long-term contracts to use its LNG export facility. It must execute on that business plan, and navigate capital markets with little room for error.
Don't risk capital you can't lose here, and don't expect perfection. Be prepared for delays, changes in its capital strategy, and the likelihood it won't give us nine-bagger returns in the next five years. But if you can, buy a little bit and stick it in the "high risk" corner of your portfolio. There's a good change it turns out pretty well, and the big sell-off in its stock in recent months gives investors a little more upside potential.
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Jason Hall owns shares of Tellurian Inc. and TerraForm Power. John Bromels owns shares of Kinder Morgan. Tyler Crowe owns shares of Brookfield Asset Management, Tellurian Inc., and TerraForm Power. The Motley Fool owns shares of and recommends Brookfield Asset Management and Kinder Morgan. The Motley Fool has a disclosure policy.