Crude oil prices are stabilizing after a brutal selloff in the fourth quarter. Amidst fears of a wider Middle East conflict, prices have found a floor around $70 a barrel. The stabilizing prices and lower valuations are favorable for energy stocks.
The main catalyst for energy stocks is the crisis in the Middle East. In the Red Sea, Houthi rebels have escalated their attacks on vessels. The area is a major oil waterway, and a serious escalation could halt oil transportation through the region. 12% of seaborne-traded oil passes through the Red Sea, so any escalation could hurt supply and boost prices.
In terms of valuation, energy stocks are very cheap relative to the market. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) has a forward price-to-earnings ratio of 21 compared to Energy Select Sector SPDR Fund’s (NYSEARCA:XLE) 11. That’s a stark valuation discount and energy stocks can rally significantly in 2024 to close this gap.
Considering the undervaluation, here are a few energy stocks to watch in 2024. All are undervalued trading below 12 times forward earnings. Furthermore, they will deliver production growth in the medium term.
Coterra Energy (CTRA)
Coterra Energy (NYSE:CTRA) has been a production growth star and is set for another solid year. On Q3 2023 earnings, it delivered an impressive 4.5% year-over-year production growth exceeding guidance. Moreover, the company raised its full-year production guidance to 655,00-665,000 barrels of oil equivalent per day.
This independent oil and gas company has been a growth story over the past decade. Revenues have increased from $1.75 billion in fiscal year 2013 to $9.05 billion in FY2022. Remarkably, it has compounded revenues at 27% annually over the past five years.
Today, the company is well-positioned for revenue growth in the coming years. It has advantaged assets with a diversified portfolio across multiple basins. Management estimates that its deep inventory in its top-tier acreage can last over 15 years.
Coterra is also one of the best energy stocks since management has shown a commitment to shareholder returns. The firm had set a return threshold of 50% of free cash flow in 2023 and will surpass the target by a huge margin. At the end of Q3 2023, the company had returned 91% of the free cash flow generated in 2023 to shareholders.
Finally, analysts are bullish on this oil and gas producer. On December 14, 2023, UBS upgraded CTRA stock from Neutral to Buy with a $31 price target. Mizuho also has it as a top energy stock pick for 2024.
Chevron (CVX)
As one of the largest integrated oil majors, Chevron (NYSE:CVX) has made several deals in the last four years. These deals have strengthened its position, added prime acreage and enabled entry into new markets. What’s more, they have added production growth and will enhance free cash flow growth after cost synergies.
In October 2020, it completed the $5 billion acquisition of Noble Energy. The deal enhanced Chevron’s position in the Permian Basin and Colorado’s DJ Basin, adding 92,000 acres. More importantly, it took over Noble’s natural gas projects in the Middle East. These assets position the company to serve the growing Israeli, Egyptian and Jordan natural gas markets.
In June 2022, it acquired Renewable Energy Group to increase its renewable energy production. And in May 2023, it bought PDC Energy in an all-stock deal worth $6.3 billion. The deal added to Chevron’s Permian acreage, creating opportunities for adjacent development. Through the PDC acquisition, it added 275,000 acres in the Denver-Julesburg Basin with more than 1 billion boe of proven reserves.
The latest and largest deal was the $53 billion buyout of Hess (NYSE:HES). According to management, the deal could enhance production and free cash growth. “Building on our track record of successful transactions, the addition of Hess is expected to extend further Chevron’s free cash flow growth,” said Pierre Breber, Chevron’s chief financial officer.
Collectively, these acquisitions have positioned Chevron as one of the best energy stocks. It now has extensive prime acreage in the Permian and growth assets like the Stabroek block in Guyana. At 11 times forward earnings, CVX stock is a bargain.
Suncor Energy (SU)
On January 3, Suncor Energy (NYSE:SU) reported that its Q4 upstream production was the second highest in its history. In the quarter, it produced 808,000 barrels per day, with December production even higher at over 900,000.
CEO Rich Kruger highlighted that December 2023 was a historic month in terms of production. “Not only did we meet the annual production guidance set a year ago, but December was also Suncor’s best month ever with upstream production averaging over 900,000 bbls/d,” he noted.
The impressive production numbers set the Canadian-based company for a great 2024. The valuation is undemanding at current levels, and there could be more upside. According to Finviz, Suncor has a forward P/E of 9 and a price-to-FCF of 10. It’s one of the bargain energy stocks with production growth.
TipRanks analysts are also bullish on SU stock and expect a solid upside in 2024. They have a $41 price target, which presents an upside of over 20%.
Management has already suggested strong production growth in 2024. Moreover, they expect production growth and disciplined capital investment to improve shareholder returns. SU stock is a buy, considering the production growth and the plan for robust shareholder returns.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
