The wild rotation that has been a hallmark of 2021 has returned, with money racing into cyclical areas; we’re still sticking with a stock-by-stock approach — such as these energy ideas, explains Mike Cintolo, growth stock specialist and editor of Cabot Top Ten Trader.

APA Corp. (APA) — formerly known as Apache — has operations both in the U.S. (about 60% of output this year, split nearly evenly between oil, gas and gas liquids) and overseas (40%-ish of output, two-thirds of which is oil), and the company does have a potentially lucrative offshore find in South America off the coast of Suriname.

But like its peers, the stock is strong today because energy prices remain elevated, production and costs have leveled off and the firm has vision into years worth of huge cash flow — APA has cranked out well north of $2 per share of free cash flow in the first half of 2021, and most of that has gone to debt reduction (long-term debt is down a whopping 21% in the first eight months of the year).

But there’s much more cash to come: Recently, management said that excluding any extra investment into the offshore Suriname area, it believes it can crank out $1.6 billion-plus of free cash flow annually for many years (“well beyond five years”) starting in 2022 (assuming current energy prices), which comes out to around 20% of the current market cap each year.

There will be further debt reduction for sure, and there will obviously be ups and downs in prices, but it likely won’t be long until big dividends and share buybacks are implemented.

All in all, APA does have more moving parts than the best energy plays — investments in Suriname plus some negotiating going on with Egypt’s government about its operations there—but there’s no doubt that the free cash flow story is very strong.

Devon Energy (DVN) has the best story in the entire sector. The company operates solely in the U.S. in a few of the most lucrative basins including the Williston, Powder River, Anadarko, Eagle Ford and Delaware.

Delaware is the big draw —in Q2, 63% of total output (and a bit more of higher-margin oil output) came from the Delaware, where it has four years of “permit inventory,” meaning lots of runway to keep drilling to keep production level (if not rising slightly).

But the real attraction here is the out-of-this-world cash flow story — with CapEx remaining relatively flat, drilling costs coming down and hedges (most at lower prices) falling off, Devon thinks free cash flow will come in around $1.30 per share, per quarter at $70 oil and $3.50 natural gas (actually well below current levels).

Of course, not all of that will be paid out, but a lot will — Devon was one of the first to have a solid base dividend (1.3% annual yield) and add in a 50%-ish payout of excess cash flow, which resulted in a total payout of 34 cents per share in Q1, 49 cents per share in Q2, and likely meaningfully more in Q3 given energy prices since June.

Moreover, this is all happening while debt is paid off rapidly to the tune of $1.2 billion so far this year (debt should total less than annual cash flow by year end). And, believe it or not, 2022 could prove even more lucrative due to cost reductions and hedge book improvements, and even if energy prices slip 10% or 20%, dividends should remain buoyant. There’s a lot to like here.

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