With energy prices down from their multi-year highs, bullishness for stocks in the space has cooled recently. Shares that spiked in tandem with soaring crude oil and natural gas prices have pulled back. That said, there is a silver lining. Right now, there are plenty of oversold energy stocks out there.
Why? Growing concern about falling demand due to a global recession may be starting to counter the factors that drove energy prices higher. For instance, Russia’s invasion of Ukraine. Even so, that’s not to say prices are set to fall back to levels last seen at the start of 2022.
Per the latest short-term energy outlook from the U.S. Energy Information Administration (EIA), crude oil prices are projected to remain elevated compared to prior-year levels through 2023. Natural gas prices could pull back next year, yet stay above late 2010s/pandemic-era levels.
This all points to oil and gas companies continuing to report strong results. With this, it’s possible the heavily discounted valuations of these seven oversold energy stocks is an overreaction. Consider buying them, as they remain at favorable prices.
Antero Midstream (AM)
Antero Midstream (NYSE:AM) owns and operates the midstream (pipeline) assets used by its former parent, Antero Resources (NYSE:AR). The pullback in energy prices has only had a moderate impact on its share price.
Still, investors may be concerned about more stock price declines ahead. Especially if it cuts its currently high dividend. Currently paying out 90 cents worth of dividends annually, it has a forward yield of 9.33%. Fortunately, as one Seeking Alpha commentator recently argued, there is a good chance it can maintain its current rate of payout.
Not only that, management expects it to have enough cash flow left over to pay down debt between now and 2025. Put it all together, and AM stock appears to be worthy of a buy at current levels. It offers a high, possibly secure yield. It could also rise in price as it de-levers its balance sheet.
APA Corporation (APA)
Better known by its former corporate name (Apache), APA Corporation (NASDAQ:APA) is not only one of the oversold energy stocks, but as it’s also one of the best undervalued large-cap stocks out there right now.
How so? First, APA stock is cheap, even for an oil exploration and production (E&P) stock. It currently trades for just 3.4x estimated 2022 earnings. That’s a multiple less than that of some other opportune E&P plays I’ll discuss further below.
Second, beyond just bouncing back once the market realizes high energy prices are here to stay, APA has another path to upside. Possible success with its Suriname offshore oil exploration project, and its aggressive debt reduction efforts, could also move the needle. One of the most clear-cut value plays out there, consider it a buy after its 36.5% drop from its 52-week high.
Vaalco Energy (EGY)
Small-cap energy stocks can be more speculative. Not to mention, more volatile. However, if you’re bullish on energy, and want to add a high-quality small-cap play to your portfolio, consider Vaalco Energy (NYSE:EGY). This E&P operator holds interests in offshore exploration projects in Western Africa.
Unlike some other tiny E&P names, Vaalco has a strong balance sheet. Its cash position ($18.94 million) far outweighs its debt position ($8.64 million). High oil prices have also resulted in strong earnings. In 2021, it reported earnings of $1.38 per share.
In 2022, it’s expected to report earnings of $1.71 per share. Not bad, given this former penny stock today only trades for around $5 per share. Down around 43.5% from its highs, it could make an outsized recovery. If you’re looking for a more high-risk, high potential return play, make EGY stock that play.
Equitrans Midstream (ETRN)
Like Equitrans Midstream (NYSE:ETRN), like Antero Midstream, owns and operates pipeline assets. In fact, both companies operate largely within the same geographic area (the Appalachian basin).
Unlike AN stock, ETRN stock has been more volatile this year. Largely, due to issues with one of its key pipeline projects (Mountain Valley). The market is also worried about another dividend cut. It slashed its payout in 2020, and the present rate of payout exceeds cash flow.
So, given its problems despite boom times in energy, why buy it? These issues may be more than accounted for. It currently yields 8.7%, and trades at a low earnings multiple (11.7x) compared to other midstream stocks. Expected to see earnings growth this year and the next, it may be able to sustain its dividend. Coupled with progress with Mountain Valley, ETRN stock could in time make a recovery.
Diamondback Energy (FANG)
As I hinted at above, there are two large-cap E&P stocks that are “pricier” than low-priced APA, but nonetheless should be considered overpriced energy stocks. The first name is Diamondback Energy (NASDAQ:FANG). This E&P company primarily operates in West Texas’ Permian Basin.
Trading for 4.4x estimated 2022 earnings, FANG stock is slightly more expensive than APA stock, yet cheaper than the oil exploration stocks sporting mid to high-single digit forward yields.
The bull case for Diamondback Energy is not complicated; here is it in a nutshell. If energy prices stay high, so too will Diamondback’s earnings. As my InvestorPlace colleague Will Ashworth recently discussed, this company plans to return 75% of its cash flow to shareholders. Through both its variable dividend, plus its share repurchase program. With a low valuation, and high implied yield, after its slide in price since June, consider it a buy.
Marathon Oil (MRO)
Marathon Oil (NYSE:MRO) is the second large-cap E&P stock that’s more expensive than APA, yet still worth buying as it has become oversold. As Louis Navellier recently put it, this is an energy stock with a simple path to strong returns.
It may not be plowing its cash flow into a high-promise exploration project, like APA is currently doing. It is, however, pursuing a similar strategy as Diamondback. That is, it’s taking the high cash flow resulting from high oil prices, and returning it to investors. Mainly, via an aggressive share repurchase program.
Since last October, its repurchases have totaled $1.6 billion. It has reduced its share count by a total of 11%. A continued steady reduction in outstanding shares will raise earnings-per-share, and in turn, its share price. This points to solid returns for investors buying it today.
Integrated energy stocks have fallen in line with energy prices. Yet among the “big oil” names that have become oversold, you may want to put Shell (NYSE:SHEL) at the top of your watchlist. I can see why this European oil giant wouldn’t be the first choice for many investors.
Shell has been under more pressure to “go green” than its U.S. counterparts. This has resulted in it investing more heavily into areas like renewable hydrogen. Uncertainty over this may be why it trades at a lower forward valuation (4.9x) than Chevron (NYSE:CVX), which trades for 8.1x forward earnings, or ExxonMobil (NYSE:XOM), which trades for 7.1x earnings.
However, this may work in your favor. Given the push for “net zero” carbon, Shell’s efforts could pay off in time. Meanwhile, it’s still generating tens of billions in cash flow from its fossil fuels business.
On the date of publication, Thomas Niel did not have (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.