Best Energy Stocks to Buy

Energy stocks appeal to investors for a few different reasons.

1. Energy stocks tend to perform independently of other types of stocks; as a result, investors buy energy stocks to diversify their portfolios.
2. Many energy stocks offer attractive yields and therefore appeal to investors who like high dividend stocks.
3. Energy stocks provide investors with a way to play rising oil prices.
4. Energy stocks can help hedge against inflation, as oil and gas prices typically rise during inflationary periods.

During the trailing one-year period, the Morningstar US Energy Index has returned 11.96% while the Morningstar US Market Index has returned 34.16%.

The energy stocks that Morningstar covers look 5% undervalued today.

To come up with our list of the best energy stocks to buy now, we screened for:

• Energy stocks that earn narrow or wide Morningstar Economic Moat Ratings. We think companies with narrow moat ratings can fight off competitors for at least 10 years; wide-moat companies should remain competitive for 20 years or more.
• Energy stocks that are undervalued relative to the average stock in the sector, as measured by our price/fair value metric.

5 Best Energy Stocks to Buy

The stocks of these energy companies with economic moats are the most undervalued, according to our metrics as of March 11, 2024.

1. Devon Energy DVN
2. Hess HES
3. HF Sinclair DINO
4. Schlumberger SLB
5. Chevron CVX

Here’s a little more about each of the best energy stocks to buy, including commentary from the Morningstar analysts who cover them. All data is as of March 11, 2024.

Devon Energy

• Morningstar Price/Fair Value: 0.79
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 5.19%
• Industry: Oil & Gas E&P

Devon Energy is the cheapest stock on our list of the best energy stocks to buy. This oil and gas exploration and production company has a narrow economic moat rating. Devon Energy is trading 21% below our fair value estimate of $59.00 and offers a 5.19% dividend yield.

Devon Energy is an oil and gas producer based in Oklahoma. It has assets in several shale basins across the United States, including the Delaware Basin, Eagle Ford Shale, STACK, and Powder River Basin. Management has reshuffled the portfolio in the last few years, divesting its Canadian oil sands business and exiting the Barnett Shale natural gas play. In January 2021, it combined with another Oklahoma-based shale firm, WPX Energy, in a “merger of equals” that significantly expanded Devon’s Delaware Basin exposure and added a small position in the core of the Bakken Shale fairway in North Dakota. The merger brought economies of scale and more efficient field operations, and enhanced the competitiveness of the combined firm.

The Delaware Basin offers the best development economics in Devon’s portfolio and will be the primary growth engine for the company. The combined firm has 400,000 net acres of leasehold in the play and derives more than half of its production from there. Management has allocated around 60% of the 2023 capital budget to developing the Delaware and is likely to prioritize the asset in future years as well. That translates to slow and steady volume increases in the basin over time.

How fast firmwide production grows will depend on the trajectory of commodity prices to an extent. But management has pledged to keep growth at 5% or less, even during upcycles (though 2023 guidance implies 7% expansion over 2022). It also intends to spend no more than 70%-80% of cash flows under any circumstances, which means any windfall during periods of higher commodity prices will be returned to shareholders rather than plowed back into new drilling. The firm was the first US exploration and production company to implement a variable dividend to funnel excess cash to shareholders, and the strategy was warmly received by the market when it came into effect in 2021 (when Devon was the top performer in the S&P 500). After 50% of free cash has been distributed in cash the remainder will fund buybacks and strengthen the balance sheet. We prefer cash returns during upcycles, when firms are more flush with cash but also when stock prices are typically higher.

Hess

• Morningstar Price/Fair Value: 0.84
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 1.19%
• Industry: Oil & Gas E&P

Narrow-moat Hess operates in the oil and gas exploration and production industry. This cheap energy stock yields 1.19%. Hess stock is 16% undervalued; we think the stock is worth $176.00.

Hess’ track record for efficiently allocating capital and generating value has been steadily improving. The company has deftly streamlined its portfolio by jettisoning less competitive and riskier positions in Equatorial Guinea, the Danish North Sea, and Libya, and by shifting the focus to more-lucrative oil and gas assets. Today the firm has two major growth assets: its 30% working interest in the Exxon-operated Stabroek block in offshore Guyana, and its acreage in the Bakken Shale play, which is U.S. onshore. Cash flows from its legacy operations in the U.S. Gulf of Mexico and Southeast Asia support Hess’ ongoing investment in these regions.

The firm’s Guyana assets will be an engine for rapid growth in the next few years, differentiating Hess from other independent upstream firms. This asset is a large reason why it is being acquired by Chevron. Slow and steady expansion has become the industry norm, with excess cash being funneled back to shareholders instead of plowed back into the ground. Hess still aims to distribute 75% of its free cash, but heavy upfront spending in Guyana is reducing that cash flow, although it still makes sense given the region’s exceptional economics and the size of the prize in the ground. The block’s gross recoverable resources are a moving target while exploration continues, but the latest estimate is over 11 billion barrels of oil equivalent. For Hess, that translates to an array of large projects. Recent guidance indicates six phases of development all online by 2027, culminating in gross volumes over 1.2 mmb/d. This includes two phases that have already been sanctioned and two that are currently producing. Even that feels conservative, with over 30 discoveries to date. We model 10 phases.

Hess is also one of the largest producers in the Bakken Shale. This includes a large portion in the highly productive area near the Mountrail-McKenzie county line in North Dakota. Management intends to develop this asset with a four-rig program that will optimize the usage of its infrastructure and expects production to reach 200 mboe/d in 2025, then plateau near that level for almost a decade.

HF Sinclair

• Morningstar Price/Fair Value: 0.84
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 3.28%
• Industry: Oil & Gas Refining & Marketing

HF Sinclair is 16% undervalued relative to our $67.00 fair value estimate. This top energy stock from the oil and gas refining and marketing industry yields 3.28% and earns a narrow moat rating.

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 mb/d 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 less competitive advantages. However, the foothold in the West Coast should help with the growing renewable diesel business given the region’s growing biofuel mandates.

The Sinclair acquisition extends HF’s push into renewable diesel, adding a production facility and pretreatment project. Combined with HF’s existing projects (two RD units and a pre-treatment unit), it now can produce 380 million gallons annually and expects future growth.

Adding Sinclair’s marketing group of over 300 distributors, 1,500 wholesale brand sites, and 2 billion gallons a year of branded sales adds a stable earnings stream HF previously lacked as a merchant refiner. In addition, it offers the ability to generate RINs whose high costs have put HF at a disadvantage in the recent past.

HF Sinclair had already begun to diversify its earnings when it acquired the Petro-Canada lubricants business, Red Giant Oil, and Sonneborn to diversify its earnings stream. It expects the segment to generate $250 million EBITDA annually while also serving as a platform for future growth.

At the same time, HF added Sinclair’s midstream assets including 1,200 miles of pipelines, eight product terminals with 4.5 mm/b of storage, and interests in three pipeline joint ventures. The incremental EBITDA of $70 million-$80 million will increase total midstream segment annual EBTIDA to about $450 million while opening up future organic and external transaction growth opportunities.

Schlumberger

• Morningstar Price/Fair Value: 0.86
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 2.13%
• Industry: Oil & Gas Equipment & Services

This narrow-moat energy company operates in the oil and gas equipment services industry. Schlumberger stock offers a 2.13% dividend yield and trades 14% below our fair value estimate of $60.00.

SLB, formerly named 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 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.

The firm also aims to localize its expertise through its “fit-for-basin” approach. SLB intends to deepen relationships with its customers by creating solutions tailored to regional or individual customer requirements. The firm aims to develop technology with high in-country value that solidifies SLB’s international market access in the long run.

Chevron

• Morningstar Price/Fair Value: 0.88
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 4.29%
• Industry: Oil & Gas Integrated

Chevron rounds out our list of the best energy stocks to buy. This stock looks 12% undervalued compared with our $172.00 fair value estimate. This oil and gas integrated company earns a narrow moat rating. The stock yields 4.29%.

We expect Chevron to deliver higher returns and margin expansion thanks to an oil-leveraged portfolio as well as the next phase of growth, which is focused on developing its large, advantaged Permian Basin position.

Its latest capital plan maintains its focus on capital discipline without sacrificing growth. Thanks to improved cost efficiencies and the acquisition of Noble Energy, Chevron plans to grow production to nearly 4.0 million barrels of oil equivalent per day by 2027 from about 3.0 mmboe/d in 2023. New volumes will largely come from new production from its differentiated Permian Basin position (size, quality, and lack of royalties), where it expects to grow volumes to 1.25 mmboe/d by 2027 from about 700 mboe/d in 2022 while delivering returns of nearly 30% and about $5 billion of free cash flow by 2027.

Chevron's Permian growth will be supplemented by expansion projects at Tengiz in Kazakhstan, due to begin producing in mid-2023, new developments in the Gulf of Mexico, and potential new discoveries in Mexico and Brazil. Chevron also now has growth options with offshore gas fields in the Eastern Mediterranean with the Noble acquisition.

Oil and gas prices will dictate Chevron’s earnings and cash flow for the foreseeable future. However, the company is investing in low-carbon businesses to adapt to the energy transition. It recently tripled its investment to $10 billion cumulatively by 2028, with this capital flowing to emerging low-carbon areas that fit with Chevron’s existing value chains and experience. Greenhouse gas reduction projects and carbon capture and offset will enable Chevron to achieve its emission targets while investments in hydrogen and renewable fuels will give it a toehold in emerging businesses that could expand in the future.

Chevron expects the combination of new higher-margin projects along with ongoing cost reductions and operational improvements to drive return on capital employed to above 12% by 2027. Meanwhile, strong free cash flow will go toward steady dividend growth and repurchases, demonstrating management’s ongoing commitment to capital discipline and shareholder returns.

How to Find More of the Best Energy Stocks to Buy

• Review Morningstar’s comprehensivelist of energy stocks to investigate further.
• Use the Morningstar Investor screener to build a shortlist of energy stocks to research and watch.
• Read the latest news about notable energy stocks from Morningstar’s Stephen Ellis and Katherine Olexa.