Energy Still Looks Attractive In 2023, Especially With These Dividend Picks

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Energy was the only sector that outperformed in 2022, gaining nearly 60% versus the S&P 500’s almost 20% plunge by the time the year ended. As a result, many investors might be wondering whether that strength will continue in 2023.

At least for now, we’re seeing companies like EQT and Diamondback Energy put up strong performances, up 7% and 10%, respectively, since the year began. Macro and other factors suggest 2023 could also be a good year to invest in some corners of the energy sector, although the reasoning for its outperformance might differ from last year’s drivers.

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Oil Demand Expected To Surge

Of course, energy prices are always key drivers propelling the prices of energy stocks, and right now, oil is outperforming natural gas, with WTI crude rising 1% versus the 3% decline in natural gas prices. Uncertainty around oil demand remains high, but U.S. inflation data is supporting oil prices as consumer prices declined for the first time in over two and a half years.

WTI oil continues to hover around $80 a barrel while brent approaches $85 amid reports that Chinese oil demand is likely to reach a record high of 16 million barrels per day in 2023. Beijing finally lifted its zero-COVID policy, and China is expected to recover in the second quarter.

In fact, the nation is already preparing for its reopening, and Beijing has issued a massive batch of oil import quotas for its private refiners. ING expects global oil demand to increase by about 1.7 million barrels per days, with about half of that increase driven by China. The firm also sees some upside risk to its forecast.

Strong Production Restrains Natural Gas

Unfortunately, the natural gas market isn't doing as well as oil. Reports about production climbing are pressuring natural gas, which is hovering just below $3.60. Global volumes of liquified natural gas imports are up 7% year over year to 409 million tons, a new record high.

Market rumors suggest the restart of Freeport's gas liquefaction facility could be delayed again, but the company remains resolute on its plan to restart production in the second half of the month. U.S. exports of liquefied natural gas fell 15% after the June explosion at Freeport's facility.

If or when the facility begins operating again, feedgas deliveries to liquefaction terminals throughout the U.S. are expected to rise by about two billion cubic feet per day. As a result, concerns about overproduction continue to weigh on natural gas prices, which have been cut in half in less than a month.

Energy Stock Picks With High Dividend Yields

Although the uncertainty around natural gas is significant right now, there are other reasons to be bullish on natural gas producers. Many energy companies offer sizable dividend yields that boost investors' total returns, providing support as volatility continues in 2023. Goldman Sachs is putting forward several names with attractive yields that should boost total returns.

For example, Canadian Natural Resources Ltd (NYSE:CNQ) offers a heft yield of 4.35%. The shares already have momentum in 2023, rising 10% since the beginning of January. Since Canadian National has only climbed about 14% over the last 12 months, this could be one stock with more room to run.

Additionally, the company is a diversified energy provider spanning crude oil, natural gas and natural gas liquids, ensuring that it enjoys benefits from gains in either of these two commodities.

ConocoPhillips (NYSE:COP) offers a dividend yield of 4.31% and is also a diversified energy provider spanning the crude oil, natural gas, liquefied natural gas, and bitumen markets.

Phillips 66 (NYSE:PSX) offers a dividend yield of 3.8% through its four divisions consisting of Midstream, Refining, Chemicals, and Marketing and Specialties. The company also enjoys benefits from its tax-advantaged structure while diversifying its operating businesses.

Pioneer Natural Resources Co (NYSE:PXD) offers a massive dividend yield of 11.03% and develops and produces oil, natural gas, and natural gas liquids. The company holds significant proven but undeveloped reserves and developed non-producing reserves and holds interests in 11 gas-processing facilities. While there is a chance Pioneer could reduce its dividend yield, it certainly looks attractive now.

Suncor Energy Inc. (NYSE:SU)'s dividend yield is an attractive 4.75%. The company focuses mostly on developing petroleum resources in Canada, exploring, purchasing, developing, producing, and selling natural gas and crude. Suncor also transports and refines crude and markets petroleum and petrochemical products, which gives it further diversification.


Energy Picks With Lower Dividend Yields

While the energy sector has long been attractive for its high dividend yields, some companies with lower yields still look attractive.

For example, Goldman Sachs recommends EOG Resources Inc (NYSE:EOG). Its dividend yield is lower at 2.56%, but the company is one of the leading independent exploration and production companies in North America, the U.K., and China. EOG serves the crude, natural gas, and NGL markets via its production areas in New Mexico and Texas and in Trinidad and Tobago.

One non-Goldman pick is Diamondback Energy Inc (NASDAQ:FANG), which has a dividend yield of 2.07%. As primarily an oil play, Diamondback stands to benefit significantly from China's reopening. Its fundamentals also look particularly attractive.

Diamondback generated impressive margins with $4.4 billion in net income on $9.1 billion in revenue for the last 12 months. The company also generated $3.2 billion in free cash flow for the last 12 months.

Finally, one company worth monitoring is EQT Corp (NYSE:EQT). It's the largest U.S. natural gas producer, which means it should benefit dramatically if or when the uncertainty around the commodity clears up and ends up being bullish.

EQT is currently in recovery mode, having generated nearly four times as much free cash flow for the last 12 months versus what it did in 2021 ($2.1 billion versus 2021's $607 million).