Key Points
Enterprise Transfer Partners could generate steady double-digit returns.
Diamondback Energy’s shareholder-friendly return-of-capital policies make it a top choice among exploration and production stocks.
Transocean’s upcoming merger with rival Valaris could move the needle, but the real payoff could arrive if the offshore rig space keeps bouncing back.
Energy stocks remain top of mind among investors. Interestingly enough, it’s not just the recent conflict in the Middle East that is piquing interest in this sector. Although geopolitics is in the driver’s seat in terms of driving crude oil and natural gas prices higher and lower, other factors are at play, including rising electricity demand driven by the artificial intelligence (AI) data center boom.
There’s much to suggest investors may want to increase their exposure to energy stocks, from oil stocks and natural gas stocks to more niche varieties like pipeline stocks and contract drilling stocks. The following three stocks are likely to generate strong total returns: Energy Transfer Partners (NYSE: ET), Diamondback Energy (NASDAQ: FANG), and Transocean (NYSE: RIG).
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Energy Transfer Partners is a high-yielder with strong and steady growth prospects
Energy Transfer Partners operates a 125,000-mile pipeline and energy transportation network. This makes this master limited partnership (MLP) one of America’s largest midstream energy companies. As an MLP, Energy Transfer must distribute the lion’s share of its taxable income directly to investors. As a result, it provides a relatively high yield from its quarterly cash distributions.
Currently, Energy Transfer Partners has a forward dividend yield of around 7%. This MLP has a mixed track record in terms of dividend growth, having suspended payouts during the earlier days of the COVID-19 pandemic. However, Energy Transfer has steadily increased its payout since, with dividend growth averaging 4.2% annually over the past five years.
It gets even better. Thanks to a spate of new pipeline projects, including projects providing natural gas to AI data centers, management anticipates the MLP will continue to raise payouts by between 3% and 5% annually.
The stock is reasonably priced at 12.5 times forward earnings estimates and likely to rise in tandem with dividend growth. Combine that with the aforementioned 7% payout, and there’s a clear-cut path to double-digit annualized returns for Energy Transfer Partners.
Diamondback Energy is a dividend and buyback machine
Diamondback Energy is arguably one of the more unusual oil dividend stocks. On the surface, Diamondback is not exactly a high-yielder. Shares in this Permian Basin–focused oil and gas production and exploration company have a forward yield of a little over 2%. However, Diamondback notes that it returns “at least 50% of adjusted free cash flow to the company’s stockholders through repurchases under the share repurchase program, base dividends, and variable dividends.”
Last year, Diamondback met this commitment through the regular dividends and via buybacks. It didn’t pay out any special dividends. However, this could change for 2026, given how crude oil prices are now near record highs. Anyhow, whether paid out as dividends or returned through share repurchases, these return-of-capital efforts are likely to boost the stock’s long-term gains.
Shares have soared by nearly 30% year to date. Barring another spike in oil prices, it may be a while before Diamondback shares surge once again. Other factors, such as recent insider selling, as well the company’s recent secondary equity offering, may have you concerned about price performance in the near term. However, if you are bullish on oil prices, Diamondback Energy, with its shareholder-friendly return-of-capital efforts, along with its reported lower production costs, is a solid choice among exploration and production stocks.
Transocean’s turnaround is just starting to take shape
The past decade was especially troublesome for offshore contract drilling companies like Transocean. However, over the past year, shares have made a tremendous recovery, rising by nearly threefold. While rising oil prices have played a role, that’s not the sole reason Transocean has mounted such a big comeback.
In recent years, market conditions have become considerably more favorable for the contract drilling space. As major oil companies ramp up offshore production, daily drilling rig rental rates have doubled, from $300,000 to $600,000 per day. A lack of rig supply is also creating ideal conditions for companies like Transocean to profit.
That’s not all. As the backdrop improves for Transocean, the company is further seizing the opportunity by merging with competitor Valaris (NYSE: VAL). Management expects the merger, which was announced in February, to create $200 million in annual cost synergies. The transaction will also diversify Transocean’s fleet, increase its backlog, and significantly reduce the company’s ratio of debt to earnings before interest, taxes, depreciation, and amortization (EBITDA).
The real payoff, however, could arrive if the offshore drilling recovery continues. A decade ago, during the last “boom times” for the space, Transocean was regularly earning around $2 per share, versus the $0.23 per share analysts forecast the company will earn this year. Not too shabby, considering Transocean’s current $6 share price.
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Thomas Niel has no position in any of the stocks mentioned. The Motley Fool recommends Transocean. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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