While the TSX broad market index is near all-time highs, the energy sector has underperformed over the past two years. As inflation cools down and central banks continue to lower interest rates, capital-intensive energy companies are expected to resume their upward trend. Investors interested in energy stocks may consider adding the following two stocks in the portfolios.
Hess Midstream (NYSE:HESM) owns, develops, operates and acquires midstream assets. The company owns natural gas gathering and compression, crude oil gathering systems and disposal facilities, and a natural gas processing and fractionation plant in North Dakota.
Hess Midstream has a current market capitalisation of around $8 billion and a dividend-adjusted yield of nearly 160% since its April 2017 IPO. It also provides a decent dividend yield of 7.3%.
Hess expects its adjusted earnings to grow from $2.08 per share in 2023 to $3.20 per share in 2025; free cash flow is projected to increase from $621 million in 2023 to $721 million in 2025. From $1.20 per share in November 2017 to $2.74 per share in 2024, Hess has grown its dividend by 11 per cent per year over the past five years. The company spends nearly $600 million a year to pay its dividend, giving it a payout ratio of 83%.
Bay Street analysts remain bullish on the energy stock, expecting a 7% gain based on the consensus price target, combined return of 15% plus dividend.
Whitecap Resources (TSX:WCP), a mid-cap energy stock, pays shareholders an annual dividend of C$0.73 per share and has a forward yield of 7.1%. The company expects its capital flow to exceed C$1.65 billion in 2025, with capital investment projected at C$1.15 billion, implying free capital flow of close to C$500 million, of which C$438 million will be used for dividend distributions.
Between 2010 and 2014, Whitecap’s funds flow grew at a compound annual growth rate of 12 per cent due to organic growth and acquisitions. Since June 2013, the company has paid C$2.1 billion, or C$5.33 per share, to shareholders through dividends.
Over the next 12 months, the company expects capital investment to continue to drive a gradual increase in free money flow and dividends. In fact, Bay Street analysts tracking the stock expect the dividend to grow at an annual rate of 8.4 per cent over the next two years.
Whitecap’s goal of generating about C$4 billion in free capital flow by 2029 suggests its dividend payout should continue to increase over the next five years. With the extra funds flow, the company aims to reduce debt on its balance sheet and achieve debt-free by 2029, while capital expenditures total C$6 billion. Analysts remain bullish on Whitecap stock, expecting it to rise 30% over the next 12 months.
