1 Top Stock to Play the Energy Sector Rebound

Investors can still find good deals in the energy sector. Here’s why this top stock looks undervalued.

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Oil and natural gas prices are on a roll, and the share prices of companies in the energy industry are moving higher.

As we saw last year, this sector can be volatile. Buying pure-play producers near the lows can generate strong gains on the upswing, but these bets also put your investment at risk when oil and gas prices go through major pullbacks. The energy sector has a history of taking the stairs up and hopping on the elevator on the downside. That’s just the nature of the commodities markets.

There is a way, however, to benefit from the rebound in oil and gas without taking on the direct producer risks. Investors can buy the shares of energy infrastructure companies that provide essential services to the oil and gas producers. The midstream players collect fees for moving or storing the oil and gas rather than relying on market prices for the actual commodities.

As long as demand is strong, these companies make good money, regardless of the market price for the hydrocarbons.

The pandemic shutdowns put a big dent in oil demand, and that hit some of the infrastructure players, but the selloff across the segment looks a bit overdone for many of the companies that have diversified revenue streams. Some of the stocks still look undervalued.

TC Energy

TC Energy (TSX:TRP)(NYSE:TRP) is a major player in the energy infrastructure industry with 93,300 km of natural gas pipelines, 4,900 km of oil and gas liquids pipelines, 650 billion cubic feet of natural gas storage, and more than 4,000 megawatts of power production capacity.

The assets are located in Canada, the United States, and Mexico. TC Energy is working through a $20 billion secured capital program and is evaluating additional opportunities that should drive revenue and cash flow growth for years.

All of the capital projects are supported by long-term contracts or are regulated businesses. This is important for dividend investors who want to be sure their dividend payments are reliable and will continue to grow.

TC Energy expects to raise the payout by an annual rate of 5-7% over the medium term. Investors can buy TC Energy stock for close to $61 at the time of writing and pick up a 5.6% dividend yield. The shares traded above $75 before the pandemic, so there is decent upside potential, as the energy sector extends its post-pandemic recovery over the next couple of years.

TC Energy has officially cancelled the Keystone XL oil pipeline after the U.S. government revoked a presidential permit for the project earlier this year. TC Energy is now pursuing a claim of US$15 billion under NAFTA to recover economic damages. Investors shouldn’t buy the stock on the hopes of a legal windfall, but any decision in favour of TC Energy could give the stock an extra boost.

The bottom line on top energy stocks

TC Energy’s diverse revenue stream, strong capital program, and attractive guidance on dividend growth make the stock an attractive pick to play the rebound in the North American energy sector.

If you have some cash to put to work in a dividend portfolio this stock deserves to be on your buy list today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool has no position in any of the stocks mentioned. Fool contributor Andrew Walker owns share of TC Energy.

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