When I am looking for stocks to buy, I like to focus on significant macroeconomic themes. As such, I have been taking a closer look at the oil and gas sector. There are two penny stocks I would be happy to add to my portfolio, considering the improving outlook for this industry in general. 

Penny stocks with potential

With oil prices currently trading at a seven-year high, I think the outlooks for Tullow Oil (LSE: TLW) and its peer, Enquest (LSE: ENQ), are brighter than they have been for years. However, it does not look as if the market holds the same opinion. I think that presents an opportunity. 

According to current City projections, Enquest could report net earnings of $156m for 2021, rising to $312m for 2022. Based on these numbers, shares in the business are currently selling at a forward price-to-earnings multiple of 1.6. 

Tullow’s valuation is just as attractive. With analysts projecting $260m of net profit for fiscal 2022, the stock is currently selling at a forward P/E of just 5. To put these numbers into perspective, shares in peer BP are currently changing hands at a P/E of 7. 

Of course, these two penny stocks are not entirely comparable to the oil giant. They have far more debt and less diversification. This means they are more susceptible to sudden changes in the oil price. If it suddenly slumps 10% or 20%, their outlooks could change overnight. This is the most considerable risk I will have to keep an eye on going forward. 

Still, with profits surging, both companies can make a material reduction in their liabilities over the next 12 months.

Unfortunately, they will not be able to capitalise on the current oil price boom immediately.

Undervalued stocks to buy

Both Tullow and Enquest use hedging programmes to protect their bottom lines from oil price volatility. This can reduce losses when prices fall, but it can also cap gains. 

Nevertheless, Tullow was forecasting $100m of free cash flow for 2021 in November, even with its hedging programme. Enquest has said that its debt position will remain unchanged during 2021 after acquiring the Golden Eagle area asset, which added 10.5k barrels of oil to the group’s overall production. 

So some headwinds will hold these companies back in the short term. However, I project that as 2022 progresses, these businesses will revise their growth and cash generation plans. As they do and begin to stabilise their balance sheets, I think the market will return to these penny stocks.

This change in sentiment could lead to a re-rating of the shares. Although this is far from guaranteed, I do not think it is unreasonable to suggest that both stocks could command a similar valuation to BP as their outlooks improve. 

Considering this potential, I would be happy to add both penny stocks to my portfolio today as a way to invest in rising hydrocarbon prices over the next year. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The Shell (LSE: RDSB) share price has been one of the best performing investments in the FTSE 100 over the past year. In that period, the stock has returned 37%, including dividends, while the FTSE 100 has added just 16.6%.

Unfortunately, even after this performance, the stock is still trading below its pre-pandemic level of around 2,300p. But I think that could be about to change. 

Rising prices

Rising demand and geopolitical tensions have pushed the oil price to a seven-year high this week. For oil producers like Shell, this is fantastic news. After two years of disruption and a period of negative oil prices, it now looks as if the industry is well on the way to recovery. 

And it is not just oil prices that are surging in value. Natural gas and other hydrocarbon products are in high demand. These are significant tailwinds for the company and its peers. 

However, I should note that this Goldilocks environment is unlikely to last forever. The commodity industry is highly volatile. Prices can rise and fall dramatically over the period of a few months.

High commodity prices tend to stimulate output growth, which can lead to oversupply and, as a result, lower prices. Volatility will always be the biggest challenge any commodity company has to deal with. 

Still, Shell’s outlook right now is the brightest it has been for many years. According to City analysts, the company is on track to report earnings per share of around 178p for 2021, increasing around 20% from 2019 levels. Further growth of 33% is expected in 2022. 

Shell share price opportunity

I think this earnings growth alone can justify a higher Shell share price, but the firm could also attract investors for its cash returns and investment plans. 

Shell’s management is committed to returning cash to investors. Indeed, at the end of last year, the group reorganised its corporate structure as part of its attempts to return more money to investors. This unified structure will allow the company to accelerate its share buyback policy. 

On top of this, the enterprise is planning to invest significant sums over the next decade in renewable energy technologies. With profits at the hydrocarbon business rising, Shell will have more capital to play with, suggesting the corporation can increase shareholder returns, keep debt at a manageable level, and increase spending on renewable technologies. 

On this last point, while the company made its name in the oil and gas business, the enterprise must prepare for the future. This means investing in renewable and clean energy technologies.

With profits rising, the group should be able to increase spending and accelerate its drive into clean energy. This could help improve investor sentiment towards the enterprise and underpin future earnings potential. 

All in all, I am excited about the potential for the Shell share price over the next few years. That is why I would buy the stock for my portfolio today.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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Remember during the early days of the Covid-19 crisis when oil prices collapsed in April 2020? The price of a barrel of Brent Crude crashed below $16. This would have been unimaginable in 2019. But those days are long gone, thanks to the global economy’s comeback. On Tuesday, a barrel of Brent surged to a high of $88.13, before easing back to $86.97 as I write. At its 52-week low on 22 January 2021, Brent Crude bottomed out at $54.48. Since then, it’s gained almost $32.50 a barrel. That’s a surge of 59.6% in under a year. As a result, oil prices are at seven-year highs, lifting global inflation. Hence, with the oil price at its highest level since October 2014, should I buy BP (LSE: BP) shares now?

BP shares have doubled since October 2020

On Tuesday, BP shares closed at 395.75p, up 2p (0.5%) on the day. Since 31 December, the BP share price has leapt by almost a fifth (+19.7%). What’s more, it’s soared by 42.1% over the past six months and 31.4% in a year. Also, it’s almost 150p higher than the 52-week low of 250.35p on 2 February 2021.

But what’s remarkable is how far BP shares have come since they crashed to generational lows in Autumn 2020. On 28 October 2020, with BP stock having collapsed to 195.74p, I wrote that BP stood for Bumper Profits. I also wrote: “It’s time for bold investors…to bite the bullet and buy big.” I’m delighted to have made this value call, because BP shares have more than doubled since then, surging by £2 (+102.2%) to date. Wow.

However, the big question is, would I buy BP at current price levels? On fundamentals, BP shares no longer look cheap to me. The global energy giant is now valued at £77.8bn, making it a FTSE 100 super-heavyweight once again. The stock trades on a price-to-earnings ratio of 16.7 and an earnings yield of 6%. The dividend yield is just short of 4% a year, in line with the wider Footsie. To me, these figures don’t exactly stick out as being in value territory.

But BP’s earnings are set to soar

Then again, the above fundamentals reflect BP’s recent past and not its future. With oil prices racing upwards, BP is poised to make money hand over first. And what if the oil price gushes to $100 on supply shortages, as several analysts forecast? Then BP would make out like a bandit, generating huge revenues, cash flows and earnings. In this scenario, the group may decide to reward long-suffering shareholders (remember Deepwater Horizon in 2011?) with big share buybacks and higher dividends. In this outcome, BP shares might well continue on their 2021-22 trajectory.

On the other hand, what happens if Covid-19 mutates into a dangerous new variant, triggering more social restrictions and lockdowns globally? This would spell bad news for energy prices and, most likely, for BP and its shares. But supply cutbacks by OPEC+ oil-producing nations might cushion the blow to oil prices. Alternatively, if the global economy really booms, maybe oil could return to its October 2014 high of $115. Who knows?

What I firmly believe is that BP’s profits in H1/2022 could be way ahead of those in the first half of 2021. Therefore, though I don’t own BP shares today, I’d buy at the current price just below £4.

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

The first thing I do when searching for passive income ideas is to look for dividend stocks. Ideally, I want to find companies with high yields, but with dividends that are growing each year. My requirement for high dividend yields normally leads me to the FTSE 100 as it’s full of attractive dividend stocks. But what about the FTSE 250?

Can I diversify my portfolio with these smaller companies, and still generate passive income? I think these two stocks could be the answer.

A FTSE 250 investment company

The first stock I’d buy is the £3.4bn investment company HICL Infrastructure (LSE: HICL). It specialises in making investments in core infrastructure projects primarily in the UK, but also within the eurozone and the US. HICL’s investment proposition aims to deliver long-term and sustainable income from its portfolio, which makes it a strong contender for generating passive income.

I particularly like HICL due to the diversification it can bring my portfolio. It offers something different from the more typical financial services, mining and energy stocks that are big dividend payers in the FTSE 100. For example, HICL shows on its website that its infrastructure investments have provided access to healthcare facilities for more than 10m people. Its portfolio is diversified across defensive sectors such as education and transportation too.

HICL also hasn’t missed a dividend payment since at least 2008. I think this shows the company’s infrastructure investments are critical to a functioning economy. Dividends are also paid quarterly, which is an added benefit to support my passive income stream.

Analysts are forecasting a dividend yield of 4.7% for 2022. This is a very respectable yield for my portfolio. However, there’s been little growth in the dividend over recent years. There’s no growth forecast in 2022 either. On top of this, the share price was extremely volatile during the Covid-related sell-off, which is something I have to keep in mind.

On balance though, I’d buy this FTSE 250 stock to generate passive income.

A slightly more unusual stock for passive income

The next company I’d consider for passive income is Greggs (LSE: GRG). It might not be the first choice in the FTSE 250, simply because the dividend yield isn’t the highest. Nevertheless, it has other attractive characteristics.

First, the forward dividend yield isn’t that low in my view. Analysts are forecasting a yield of 2.1% in 2022. I think this is respectable income for my portfolio.

The biggest draw for me, though, is the potential for dividend growth. Indeed, Greggs is expected to grow its dividend payment by 18% in 2022. There’s a good chance that this growth will continue in the years ahead. In this regard, I was encouraged by the trading update released just this month. Full-year results are now expected to be ahead of previous expectations, with the company saying there are “attractive opportunities to invest for growth”.

However, with Greggs, there’s a risk that these opportunities don’t work out. This would be detrimental to any future dividend growth and then impact my passive income stream.

So, in summary, I view HICL and Greggs as two FTSE 250 stocks with attractive income potential in the years ahead. Greggs should be able to grow its dividend over time, and HICL offers the more dependable and higher yield today.

Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Aside from trying to make money via share price gains, I can use dividend stocks to generate income. This income can go towards offsetting my monthly bills, as well as being stashed away to save up for a nice holiday. I estimate that I’d need £4,000 over the course of this year to achieve this. With that end goal, here’s how I’m trying to get there.

Dividend stocks I’d include

First, let’s consider the dividend stocks that I’d actually want to buy right now. Fortunately, the average FTSE 100 dividend yield has been moving higher over the past year. Even outside of the FTSE 100, there are some attractive companies worth considering.

In order to aim to make £4,000 this year, I need to be targeting an average yield of 8%. This means that I need an investment pot of £50,000. Given the size of my pot, I can afford to diversify in a variety of stocks, with yields above and below this mark. As long as my average comes to 8%, I’m good.

Commodity stocks have performed very well recently, as I wrote about here. Given my positive outlook, I’d include stocks such as Rio Tinto and Anglo American. These currently have dividend yields of 9.31% and 5.28% respectively.

I’ve also noted the positive trading update this week from Taylor Wimpey, and think that other firms in the property sector could have a strong 2022 with good forward order books in place. As a result, I’d buy Persimmon with a 9.12% yield and Taylor Wimpey with a 5.16% yield.

Finally, I think that financial markets will be volatile this year due to Covid-19 uncertainty, political issues in the UK and global tensions with China, Russia and others. Therefore, I’d consider buying retail trading platform providers such as CMC Markets. The business currently has a dividend yield of 10.5%.

Making the numbers work

There will be a perfect balance that needs to be struck when investing my £50,000. I don’t want to invest too much in dividend stocks with a low yield, as this will make it impossible for my to hit 8%. However, I don’t want to be too greedy and invest more in higher-yielding stocks, perhaps to chase £5,000 in income this year.

This is because usually the higher the dividend yield, the higher the risk is. The risk is primarily that the business will cut the dividend per share at some point in the future. After all, this group of dividend stocks should provide me with the income in 2022. Yet there isn’t any guarantee that the money will be paid. It’s at the discretion of the management team to decide whether a dividend will be paid or not.  That’s true for low-risk stocks as much as higher-risk ones, of course. To achieve my target, that might mean I’d need a larger investment pot.

With all that in mind, I’d prefer to find a balance between all of the stocks that I’ll be buying. This helps to diversify my risk, so that if one stock does struggle, I won’t see my income for the year drop by thousands. By taking out as much risk as I can, I’ll hopefully be able to count the money coming in later this year.

Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I believe Assura (LSE: AGR) could be one of the most secure UK dividend stocks out there. This share specialises in the provision of primary healthcare properties like GP surgeries. Such facilities are a vital part of everyday life, providing companies like Assura with exceptional earnings visibility. The rents the business receives are also backed by the government, providing them with an extra layer of security.

Assura’s profits may suffer if NHS funding declines. But, for the time being, things look pretty rosy for the business. In fact, investment in primary healthcare properties is rising as policymakers try to divert patients away from hospitals.

Assura has a strong record of annual earnings growth under its belt. And City analysts think earnings will rise 16% in this financial year (to March 2022), too. Today, the business carries a mighty 4.6% dividend yield. This, allied with its reliable profits and solid cash generation, makes it a top income stock for me to buy.

Go with the flow

Snapping up United Utilities Group (LSE: UU) for a potentially-turbulent 2022 might be another good idea for me. This FTSE 100 stock, like Assura, doesn’t have to worry much about whether the Covid-19 crisis rolls on.

The problem of soaring inflation also won’t hit its operations (though it might significantly push up the cost of its debt). The water United Utilities supplies to people’s homes and businesses will remain largely unchanged, whatever social, economic or political crisis comes down the pipe (so to speak). This will give it the confidence and the financial means to continue paying big dividends to its shareholders.

Speaking of which, for this financial year to March, United Utilities carries a chunky 4.2% dividend yield. I’d buy it even though its operations can be expensive and shareholder returns might suffer as a result.

A dirt-cheap UK dividend stock

Sylvania Platinum’s (LSE: SLP) a UK share that offers a brilliant bang for your buck across the board. For this financial year to June, the platinum group metal (PGM) producer trades on a forward price-to-earnings (P/E) ratio of just 4.4 times. Meanwhile, the dividend yield clocks in at an inflation-mashing 5.6%.

The business of mining is extremely hazardous, of course. Exploring for metals, developing a mine, and finally pulling the commodities from the ground are all massively complex processes so problems at any stage can be highly expensive. Profits expectations can be rubbed out at a stroke and this can have a big impact on the share price of small operators like this.

This is a risk I’d be prepared to take with Sylvania however. Firstly, I find the terrific all-round value it offers highly appealing. And if the company gets it right, profits could potentially explode.

Demand for PGMs looks set to rise sharply as the amount required to build autocatalysts heads steadily higher. The precious metals reduce car emissions and so are critical components in the fight against climate change.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Amazon (NASDAQ: AMZN) stock has dipped in recent months, falling from highs of $3,700 in November to its current price of $3,160. This decline has led to many seeing Amazon shares as a top stock to buy, but I prefer another e-commerce stock.

Why am I not buying Amazon shares?

Amazon dominates the e-commerce market and has seen tremendous growth over the past few years. In fact, in 2018, the company recorded net sales of $233bn, and these increased to $386bn in 2020. In 2021, net sales should easily exceed $400bn. Profits have also increased in line with sales, with the company seeing year-on-year profit growth of 84% in 2020.

But despite such excellent growth, there are signs that the pandemic boom is easing, and growth is starting to slow. Indeed, for Q4 2021, Amazon expects sales between $130bn and $140bn, which is ‘only’ year-on-year growth of between 4% and 12%. Further, the company is experiencing several headwinds due to labour shortages, wage inflation and global supply chain constraints. This is likely to lead to around $4bn in costs and will see fourth quarter operating profits drop significantly from the $6.9bn it recorded last year. Such slowing growth makes the company’s price-to-earnings ratio of around 60 hard to justify. It remains a hugely successful company, of course. But all this is why I’m avoiding Amazon shares, in favour of other e-commerce stocks.

The e-commerce stock I’d buy instead

Sea Limited (NYSE: SE) did extremely well during the pandemic. At its IPO it was $15 a share (in 2017), yet it reached more than $350 a share in 2021. But things have been worse recently, and the shares are currently priced at around $170. This is partly due to rising inflation, which is a major negative for growth stocks, and will likely make it more expensive to borrow money. Further, this month, the company’s largest shareholder, Tencent, also reduced its stake in the company. This saw the shares dropping around 10% on the back of this news. So, why would I still buy?

Firstly, the company offers far more than just an e-commerce stock. Indeed, it also provides mobile gaming and digital payment services. This includes the mobile app Free Fire, which was the most-downloaded mobile game globally in 2019 and 2020. Free Fire brings in a significant amount of profits and cash flow to the company.

These profits have been reinvested in the e-commerce business, Shopee, and the payments, subsidiary, Sea Money. I’m particularly impressed by Shopee, considering its recent expansion. In fact, it now operates all around the world, including in Asia, Latin America, and some parts of Europe. Many of these countries, especially in Asia and Latin America, are expected to see very large growth in the e-commerce sector.

Such diversification has also meant that revenues for 2021 are likely to reach around $9bn, over a 100% increase year-on-year. As such, it’s clear that Sea Ltd is growing at a far quicker pace than Amazon, even though it remains unprofitable. After its recent dip, Sea Ltd also trades at a price-to-sales ratio of just over 10, which seems reasonable for such a fast-growing company. Therefore, I’m extremely tempted to buy some shares.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon and Sea Limited. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.