The market has recorded an impressive rally over the past year, consistently reaching new record highs week after week. Nevertheless, not all sectors have shared in this success. The energy sector, in particular, has lagged recently. When a sector underperforms relative to the overall market, it often presents attractive opportunities for investors. This is because high-quality companies within the underperforming sector often get sold off along with the rest of their peers, even though their underlying financial performance has remained robust. In this article, we will explore three energy stocks to buy and hold for considerable future total return potential. These beaten-down stocks offer investors a chance to buy quality companies in the sector at rather attractive valuations.

Whether you are just beginning your investment journey with your first $1000 or looking for new ideas within the energy sector to deploy your next $1000, these three stocks offer compelling opportunities. Let’s take a deeper look!

ConocoPhillips (COP)

The first energy stock that has lagged behind the overall market and is worth considering at its current levels is ConocoPhillips (NYSE:COP). As one of the world’s largest exploration and production (E&P) companies, ConocoPhillips is a fitting pick for investors seeking exposure in the sector, particularly those bullish on oil. This is quite relevant in today’s highly unstable geopolitical environment, which is likely to sustain elevated oil prices.

One of ConocoPhillips’ most notable competitive advantages is its geographically diverse portfolio of assets, which helps mitigate risks associated with regional market fluctuations and geopolitical tensions. Again, this is especially meaningful in today’s landscape, where energy assets are becoming increasingly critical. The ongoing sanctions on Russian energy, the unstable situation in the Middle East, and the effective closure of the Suez Canal due to ongoing Houthi attacks highlight the benefits of such a diversified portfolio.

ConocoPhillips recorded a free cash flow of $8.72 billion last year. Due to more favorable oil prices this year, Wall Street forecasts free cash flow to rise to just over $10 billion in FY2024. Thus, the stock is currently trading at just 13X this year’s expected free cash flow. Assuming you expect the company’s free cash flow to grow further over the medium term on the back of higher oil prices, ConocoPhillips seems like a great energy stock to buy at its current levels.

USA Compression Partners (USAC)

Next up on the list is USA Compression Partners (NYSE:USAC). Given its rather small $2.8 billion market, not many investors are familiar with the company. Hence, for context, USAC is a leading provider of natural gas compression services. It specializes in providing essential infrastructure for producing, processing, and transporting natural gas, which is vital for ensuring the steady flow of natural gas from producers to end markets.

The partnership’s track record has been quite strong over the years, with USAC also paying out rather generous distributions. USAC has sustained its quarterly distribution rate stable at $0.525 since mid-2015. Although the absence of distribution raises for nearly a decade might seem unappealing, USAC’s distribution yield has consistently ranged between 7% and 15% during this time (excluding special occasions such as the COVID-19 flash crush). Consequently, USAC holders have enjoyed substantial income levels.

With the stock undergoing a gradual decline since mid-March, today appears like a terrific time to go long on USAC. With the stock currently yielding 8.9% and USAC seeing record demand for its services, including revenues hitting a new record last year, its investment case is particularly fruitful. The stock’s forward EV/EBITDA also stands just below 10X, implying a notable margin of safety, especially in the context of a potentially bullish environment for the best energy stocks to buy over the medium term.

TotalEnergies (TTE)

I am concluding this list with TotalEnergies (NYSE:TTE). The French powerhouse is one of the largest energy companies in Europe. The company operates across the entire energy value chain, encompassing oil and gas E&P, refining, chemicals, and an expanding footprint in renewable energy. Due to its vast scale, the company plays a crucial role in Europe’s energy security and has historically proven a great buy on dips. With shares trending downward during May and June, another such buying opportunity appears to have emerged again.

TotalEnergies is particularly likely to appeal to income-oriented investors. The company has increased its dividend annually for the past 24 years in its original Euro denomination, which is quite impressive given the underlying cyclicalities affecting the energy sector. For this reason, TotalEnergies has built a strong reputation among investors seeking reliable income. Today, the stock’s yield stands at 5%, marking a decent entry point.

Another reason I am keen on the stock near its current price level is its cheap valuation. At just 7.4X its forward earnings, TotalEnergies is trading at a valuation beneath its historical average, marking another reason why the stock presents a compelling opportunity among energy stocks to buy. If oil prices remain strong in the coming quarters, I believe the stock is likely to undergo a multiple expansion, which would translate to strong total return prospects, along with the underlying dividend.

On the date of publication, Nikolaos Sismanis 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.