Investing in energy stocks requires a relatively high risk tolerance, because the sector is prone to market volatility and geopolitical uncertainty. However, there are several compelling reasons why investors should consider including energy stocks in their portfolios.

For starters, global energy demand is rising. Furthermore, the energy industry is cyclical, with periods of boom and bust. During downturns, savvy investors can find opportunities to buy energy stocks at lower valuations, anticipating a price rebound when the industry cycle turns upward.

On top of that, many energy companies are known for paying attractive dividends, allowing income-seeking investors to earn consistent passive income. Two such energy companies that Wall Street is optimistic about are Matador Resources (MTDR) and Schlumberger (SLB). Analysts rate both stocks as “strong buys,” with around 30% upside expected in the next 12 months.

Matador Resources Stock

Founded in 2003, Matador Resources has focused on acquiring, exploring, and developing oil (CLG24)and natural gas (NGG24)resources primarily in the U.S. Matador Resources' operational focus centers on key regions, notably the Delaware Basin and the Eagle Ford Shale. The company currently owns and operates seven drilling rigs, with plans to add another one in the first quarter of 2024.

Matador's revenue has increased steadily, from $899 million in 2018 to $3.06 billion in 2022. Similarly, its earnings have increased from $2.41 to $10.11 per share during the same period. This most likely explains the share price gain of 262% over the last three years. 

According to the company, the most recent third quarter marked its best quarter of total production, with over 135,000 barrels of oil and natural gas equivalent (BOE) per day.

Matador is also a dividend stock, with a yield of 1.4% versus the energy sector average of 4.2%. While the yield is relatively low, the consistency in dividend payments and hikes shows the strength of its operations. Additionally, the low payout ratio of 9.5% implies there are a lot of opportunities for dividend growth in the future.

The company generated an adjusted free cash flow of $144.6 million in the quarter, which it intends to use to pay down debt, fund future acquisitions, and pay dividends. It recently increased its quarterly dividend from $0.15 to $0.60 per share, marking the fourth such increase since it began paying dividends in 2021. 

Looking ahead, Matador expects to produce approximately 145,000 BOE per day in the fourth quarter, ending the year on a strong note. Analysts predict Matador's fourth-quarter revenue will increase by 13% year on year to $799 million. 

Furthermore, analysts foresee Matador’s revenue and earnings rising by 11.8% and 21%, respectively, in 2024. Priced at seven times forward earnings, Matador is relatively cheap right now for a growth and income stock.

Overall, Wall Street rates Matador stock as a "strong buy." Out of the 10 analysts covering the stock, seven rate it a “strong buy,” two rate it a “moderate buy,” and one recommends a “hold.” The average analyst price target for the stock is $71.45, which is around 29% above its current levels.

Schlumberger Stock

Founded in 1926, Schlumberger is a long-time player in the oilfield services industry. The company operates in more than 120 countries and boasts a diverse range of services, including reservoir characterization, drilling, production, and processing. Schlumberger's stock has gained 138% in the last three years, compared to the S&P 500’s ($SPX) growth of 31%.

It was a smart move on Schlumberger’s part to dip its hands intoartificial intelligence (AI). By integrating AI-driven technologies, the company is enhancing reservoir modeling, optimizing drilling operations, and enabling predictive maintenance for equipment. Its AI platform generated $2 billion in digital revenue for the full year.

The company ended 2023 strong, with a staggering 37% year-over-year growth in earnings and an 18% increase in revenue. The international and offshore markets drove Schlumberger's fourth-quarter and full-year results. The integration of the Aker subsea business joint venture, completed in October 2023, also aided overall growth. The company also generated $4.04 billion in free cash flow in 2023.

Schlumberger pays dividends, as well, with a 2.08% forward yield. Its dividend payout ratio of 26% indicates that dividends are sustainable, with more room for growth as earnings rise. Along with the quarterly results, the company announced a 10% quarterly dividend increase to $0.27 per share.

The company's rapid growth in earnings and free cash flow has enabled it to raise dividends and pay down its net debt by $1.4 billion by 2023.

Furthermore, Schlumberger intends to use its free cash flow to repurchase shares in 2024, returning more than $2.5 billion to shareholders. 

Looking ahead to the first quarter of 2024, the company forecasts revenue growth in the low teens, and an increase in EBITDA (earnings before interest, tax, depreciation, and amortization) in the mid-teens.

Analysts predict impressive revenue and earnings growth of 12.5% and 19.6% in 2024. Priced at 14 times forward earnings, Schlumberger is a reasonable buy at current levels, with its legacy portfolio and technological advancements driving exceptional growth.

Turning to Wall Street, Schlumberger stock is a “strong buy” in the analyst community. Out of the 20 analysts covering the stock, 17 rate it a “strong buy,” and three rate it a “moderate buy.” The average analyst price target for the stock is $68.55, which implies around 29.7% upside in the next 12 months.