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5 Undervalued Energy Stocks

These narrow-moat energy stocks are trading at discounted prices.

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As energy stocks rallied last year on the back of surging oil prices, valuations on many oil and gas companies stretched into expensive territory. But as 2023 has gotten underway, oil prices have slid lower on concerns about a recession, taking energy stocks down for the ride.

Now, more energy stocks are trading at valuations that could make them attractive options for long-term investors looking to put their money to work.

“If you are a five- to 10-year investor, the number-one sector you have to be looking at is the energy sector,” Richard Bernstein, the chief executive and chief investment officer at Richard Bernstein Advisors, said late last year. “The energy sector is the number-one sector for dividend yield, and it’s the number-one sector for long-term secular earnings growth.”

The dividend aspect of energy stocks has become an especially compelling part of the sector’s narrative. On the back of those high energy prices, energy stock dividends surged in 2022.

To screen for undervalued energy stocks, we looked to the Morningstar US Energy Index, which measures the performance of U.S. companies that produce or refine oil and gas, oilfield services and equipment companies, and pipeline operators.

As of March 28, 2023, the index gained 5.4% for the trailing 12-month period, while the broader market fell 11.9%, as measured by the Morningstar US Market Index. However, since the start of 2023, the energy index is down nearly 6%, while the stock market is up just over 5%.

There are a total of 70 stocks in the Morningstar US Energy Index, 34 of which are covered by Morningstar equity analysts. Of those, 11 were considered undervalued as of March 28. The full list of undervalued energy stocks can be found at the bottom of this article.

Line chart of the trailing 12-month performance of the Morningstar US Energy Index compared to the Morningstar US Market Index March 2022-March 2023.

What’s in the Morningstar US Energy Index?

The Morningstar US Energy Index consists of companies from seven different industries: oil and gas drilling; oil and gas exploration and production; oil and gas equipment and services; oil and gas Integrated; oil and gas midstream; oil and gas refining and marketing; and thermal coal. Exxon Mobil XOM, Chevron CVX, and ConocoPhillips COP are among the largest companies in this index.

Energy Stocks to Buy Now

We looked for the most undervalued stocks in the Morningstar US Energy Index as measured by those that currently carry a Morningstar Rating of 4 or 5 stars. Then we screened for stocks that have earned a Morningstar Economic Moat Rating of narrow in order to screen for companies with competitive advantages. Historically, undervalued stocks with economic moats have performed better over time than less-profitable and more highly indebted counterparts. They also tend to protect against downturns and be less risky than lower-quality stocks.

These were the five most undervalued narrow-moat stocks in the Morningstar US Energy Index as of March 28:

The most undervalued narrow-moat stock was Equitrans Midstream at a 51% discount to the fair value estimate set by Morningstar equity analysts. The least undervalued was SLB at a 16% discount.

List of undervalued narrow-moat companies from the Morningstar US Energy Index.

Equitrans Midstream

  • Industry: Oil and Gas Midstream
  • Stock Price: $5.29
  • Fair Value Estimate: $10.80

“Equitrans’ transmission assets are also high-quality, with virtually all of its revenue under firm fixed-fee reservation contracts that have a weighted average length of 13 years. This pipe is located in the central Marcellus and connects to seven different interstate pipelines. It has supported attractive new incremental investments, such as the Ohio Valley and the Allegheny connectors.

“Equitrans’ gathering and processing operations are some of the highest-quality in our coverage. Over 50% of the gathering revenue is made up of fixed-fee firm reservation contracts and minimum volume commitments with an average weighted life of 14 years. This level of contract quality means the gathering and processing assets resemble a pipeline instead of the typical gathering and processing assets under our coverage. The remainder is based on acreage dedication agreements and volumetric-based fees instead of a guaranteed fee for plant and pipeline access. Peers such as Antero Midstream AM have reported similarly high levels of fees, though they have not disclosed the same level of contract quality.”

—Stephen Ellis, sector strategist

Halliburton

  • Industry: Oil and Gas Equipment and Services
  • Stock Price: $31.29
  • Fair Value Estimate: $40.00

“We see challenges ahead for Halliburton, especially as the North American shale market grows increasingly competitive and profitability proves more difficult to maintain. Technological advances over the past several years have disseminated rather quickly among pressure pumpers, which reduces any one firm’s ability to maintain a competitive edge. In our view, Halliburton has risen to the occasion, as evidenced by its development of simultaneous fracturing, a method introduced by the firm in 2016 that’s essentially doubled the speed of well completions. We also think the industry’s push toward net-zero emissions presents opportunities in this space, and high demand for dual-fuel and electric fleets will allow Halliburton (as well as other providers of this next generation equipment) to command pricing premiums for at least a decade.

“Halliburton has astutely resolved to focus its attentions inward, maximizing profitability where it can and expanding to address international markets. We’re also encouraged by its emphasis on developing digital solutions for its clients, which we think represents the next frontier in production efficiency with the added benefit of its asset-light nature that will allow Halliburton to maximize value generation over time.”

—Katherine Olexa, analyst

HF Sinclair

  • Industry: Oil and Gas Refining and Marketing
  • Stock Price: $49.78
  • Fair Value Estimate: $63.00

“After the acquisition of Sinclair Oil, HollyFrontier, now HF Sinclair, is a fully integrated independent company composed of refining, marketing, renewables, specialty lubricants, and midstream businesses.

“Its refining footprint has grown to seven refineries totaling 678,000 barrels per day in total capacity, including the recently acquired Puget Sound refinery. The latter deal extends the company’s footprint to the West Coast, beyond its historical midcontinent and Rockies roots and into a more difficult refining market with fewer competitive advantages. However, the foothold in the West Coast should help with the growing renewable diesel business given the region’s growing biofuel mandates.”

—Allen Good, strategist

Phillips 66

  • Industry: Oil and Gas Refining and Marketing
  • Stock Price: $98.79
  • Fair Value Estimate: $116.00

“Phillips 66 remains the most diversified independent refiner with greater interests in marketing, chemical, and midstream assets than peers. While the performance of its refining segment will be the primary determinant of earnings in the near term, the midstream segment will increasingly be the value driver over time as Phillips 66 aims to grow its potential midcycle EBITDA by $3 billion to $13 billion by 2025.

“Refining will remain a critical segment as performance is set to improve. Its midcontinent refineries are some of the firm’s best positioned, given their access to discount domestic and Canadian crudes. Its two Gulf Coast refineries benefit from pipelines that provide access to discount light and heavy crude, while the coastal location affords access to valuable export markets. Projects designed to increase utilization and capture rates and reduce costs are expected to improve the segment’s positioning and performance.”

—Allen Good, strategist

SLB

  • Industry: Oil and Gas Equipment and Services
  • Stock Price: $47.64
  • Fair Value Estimate: $56.00

“SLB, formerly known as Schlumberger, is the largest oilfield-services provider in the world, with a product portfolio that addresses nearly every end market in the industry. The firm has developed an impressive reputation as one of the leading innovators in oilfield services. Roughly 20% of its annual revenue comes from new technology, and the efficiency gains that well operators realize through SLB’s services have earned the firm dominant market share in several categories, including wireline services, production testing, and logging while drilling.

“Moving forward, SLB is targeting integrated services and digital solutions. Its asset performance solutions, or APS, business allows well operators to completely outsource project management to SLB. APS increases operational efficiencies for all parties by reducing informational friction and time delays that tend to occur when contracting project stages to different service firms. The end result is reduced project costs and quicker time to production. SLB’s Delfi ecosystem also represents significant opportunities for margin expansion by providing an asset-light, highly scalable software platform that improves project efficiency while augmenting SLB’s already-impressive knowledge base.”

—Katherine Olexa, analyst

Full list of undervalued companies from the Morningstar US Energy Index.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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