The energy sector is coming off a more turbulent year. Oil and gas prices were down while interest rates rose. As a result, most energy stocks slumped in 2023.

Last year’s challenges have many energy stocks trading at compelling levels. Chevron (NYSE: CVX), Energy Transfer (NYSE: ET), and NextEra Energy (NYSE: NEE) stand out from the pack as great buys this February. Here’s why they could energize your portfolio in 2024 and beyond.

This top-notch oil stock is on sale

Shares of Chevron have slumped about 15% over the past year. While lower oil prices have weighed on the oil giant’s stock price, it has also been under pressure due to its bold deal to buy rival Hess. Chevron is paying about $60 billion to acquire Hess, which will enhance its growth while adding some risks.

Hess will add two new areas to Chevron’s portfolio (Bakken and offshore Guyana). The Bakken will provide it with another cash flow engine, while Guyana should be a major growth driver. However, there are integration risks with both regions. On top of that, Guyana is in a border dispute with neighboring Venezuela over its lucrative off shore oilfields.

Chevron is no stranger to operating in regions with geopolitical risk. It also has a long track record of integrating acquisitions. As a result, the Hess deal looks like a great move by the oil giant. It could help the company more than double its free cash flow by 2027, assuming oil prices remain in the $70s while extending its production growth outlook into the 2030s. That would give Chevron more cash to increase its already attractive dividend (currently yielding 4.1%) and repurchase its beaten-down shares.

A dirt cheap, high-yielding midstream giant

Units of Energy Transfer have actually rallied about 10% over the past year. However, the master limited partnership (MLP) still has lots of room to run. One factor driving that view is its bottom-of-the-barrel valuation:

Image source: Energy Transfer.

As that slide shows, Energy Transfer has the second-lowest valuation in its peer group. That’s a big reason why it has such a high distribution yield (currently 8.7%).

The MLP trades as if it’s not growing, which isn’t the case. As that slide also indicates, its earnings are increasing, which is giving it the fuel to continue boosting its big-time distribution. The company recently gave investors another raise and has bumped up its payout by 3.3% over the past year.

Energy Transfer generates ample excess cash after covering that payout. That gives it the funds to invest in expansion projects while maintaining a strong balance sheet. The company’s financial strength has enabled it to be a consolidator in the midstream sector (it made two deals last year). Acquisitions and organic expansion should continue growing the MLP’s earnings and cash flow, giving it the fuel to steadily increase its high-yielding distribution.

A supercharged utility stock

NextEra Energy stock has lost about 20% of its value over the past year. That was largely due to issues at its affiliate, NextEra Energy Partners. NextEra Energy had another strong year in 2023, growing its adjusted earnings by more than 9%, which exceeded the high end of its guidance range. With its earnings increasing while its stock slumped, the utility now trades at a much more attractive valuation. It also offers a higher dividend yield (3.2%).

NextEra Energy continues to run circles around its peers in the utility sector. It expects to increase its earnings at or above the high end of its 6% to 8% annual target range through 2026. That’s much faster than the roughly 5% to 7% annual growth rate many of its peers hope to achieve.

Two notable catalysts are powering NextEra Energy’s faster growth: geography and renewable energy. The company’s Florida-based electric utility benefits from the state’s above-average population growth and abundant sunshine. Meanwhile, NextEra’s energy resources segment is capitalizing on accelerating demand for renewable energy. These factors should enable the utility to continue expanding briskly in the coming years.

Top-notch energy stocks

Chevron, Energy Transfer, and NextEra Energy are compelling investment opportunities this February. The trio trades at lower valuations, giving them attractive dividend yields. Meanwhile, they have lots of fuel to continue growing their earnings and higher-yielding payouts in the future. That makes them stand out as top energy stocks to buy this month.

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Matthew DiLallo has positions in Chevron, Energy Transfer, NextEra Energy, and NextEra Energy Partners. The Motley Fool has positions in and recommends Chevron and NextEra Energy. The Motley Fool has a disclosure policy.

3 Top Energy Stocks to Buy in February was originally published by The Motley Fool

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