In its June meeting, The Organization of the Petroleum Exporting Countries (OPEC) extended most of its production cuts through the end of 2025. While some pundits view the move as an attempt to support an oversupplied market, it puts a floor on oil prices. The best energy stocks will thrive with crude oil above $70 per barrel.
Another reason to buy energy stocks is as a hedge against geopolitical turmoil. Tensions in the Middle East remain as Israel deals with threats from Hamas and Hezbollah. A spike in tensions in one of the largest oil-producing regions would trigger a price surge. Such an event would benefit the sector, especially large oil producers that have lowered their production costs per barrel to below $50.
Moreover, in terms of valuation, energy is still the cheapest sector offering substantial upside. The following are some of the best energy stocks trading at a 40% discount to the S&P 500.
Energy Transfer (ET)
Energy Transfer (NYSE:ET) owns and operates crude oil, natural gas and natural gas liquid assets, primarily pipelines in the U.S. midcontinent and Texas. These assets produce stable cash flows regardless of oil and gas prices. Thus, if you want consistent income, buy this 7.8% yielder.
In recent years, the pipeline operator has done strategic deals to increase control over gas and natural gas liquids transportation. For instance, in May, it acquired WTG Midstream for $3.25 billion. This strategic deal added 6,000 miles of gas-gathering pipelines.
While pipelines seem boring, Energy Transfer might be one of the best energy stocks to buy due to its exposure to AI and data center power demand. In recent years, the company has connected its intra-state pipelines to power plants within 10 miles. Now, it’s connected to approximately 55%-60% of Texas power plants.
Due to this connectivity, management believes it’s well-positioned to serve power needs related to AI data centers. They expect growth from this end market since Dallas, Texas, is emerging as a major data center hub.
With more than 125,000 miles of pipeline delivering consistent cashflows, Energy Transfer is a great income play. Additionally, power demand from data centers offers a new growth catalyst.
Exxon Mobil (XOM)
This integrated oil major has been a stalwart in the industry. Its scale, geographic diversification, and low production cost provide greater earnings stability than smaller peers. As a result, the company has maintained a consistent dividend record raising its dividend for 41 consecutive years.
Besides the dividend income, Exxon Mobil (NYSE:XOM) is one of the best energy stocks based on its growth profile. First, it has a substantial position in the Permian, with attractive low-cost acreage. The acquisition of Pioneer Natural Resources has enhanced this position and Exxon plans to double its Permian production to 2 million barrels per day by 2027.
Second, a significant portion of its oil production growth over the next decade will be powered by its Guyana project. Exxon estimates the gross recoverable reserves in the Stabroek block to be approximately 11 billion oil-equivalent barrels. Today, Exxon’s output in Guyana is 600,000 barrels per day and could grow to 1.5 million barrels.
The production growth from the Permian and Guyana will drive free cash flow growth to enable a significant buyback program. So far, it has committed to repurchasing $20 billion worth of stock annually. And as you enjoy the benefits of the buyback, you also earn an attractive 3.3% yield.
Weatherford International (WFRD)
Weatherford International (NASDAQ:WFRD) is an equipment and services provider to the oil and gas industry. It has a presence in domestic, international and offshore markets. Since emerging from bankruptcy in 2019, it has undergone a significant transformation that has right-sized the company and streamlined costs.
Through this transformation, it has outperformed its peers, offering better growth, execution and margin expansion. It continues to deliver double-digit year-over-year revenue growth and substantial margin expansion. In Q1 2024, it reported 15% YOY revenue growth and a 24.7% EBITDA margin.
The sector landscape is expected to remain supportive going forward. International and offshore activity continues to strengthen, which will lift demand. Based on this view, management expects double digits, low teens YOY revenue growth and a 25% EBITDA margin in 2024.
After redeeming its secured bonds ahead of schedule, Weatherford is among the best energy stocks to buy for shareholder returns. The firm has cut leverage to 1.5x, achieved its 25% adjusted EBITDA margin goal and increased its credit facility. Now, the company is in a good financial position to begin buybacks in the second half.
Barclays notes that Weatherford is showing solid execution and getting better. Therefore, they expect the valuation gap with peers to close. In line with this view, they maintain an overweight rating and a $160 price target.
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.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.
