Oil stocks have outperformed the broader market this year as prices for crude and natural gas remain at multi-year highs. But despite the growth this year, there remain many undervalued energy stocks with significant upside ahead. This is especially true as the prices for oil and gas have come off their highs since late June, and with them brought down the share prices of oil companies. Plus, while many oil stocks have already more than doubled this year, they continue to have low price-to-earnings ratios, pay monster quarterly dividends, and are buying back their own common shares as they report record profits.
Recognizing the value still to be found in oil stocks, many of the most successful and best-known investors in the world have been concentrating on buying shares in energy companies this year, including none other than Warren Buffett. As investors continue to look for bargains in the market, we look at seven undervalued energy stocks with significant upside ahead.
Undervalued Energy Stocks: Vermilion Energy (VET)
We’ll begin in the snowy wilds of Canada, which is home to many oil and natural gas companies, many of them woefully undervalued. Canada has an estimated 17o billion barrels of crude oil, accounting for 10% of the world’s proven oil reserves. America’s northern neighbor has the third largest oil reserves in the world after Saudi Arabia and Venezuela. That makes Canada an ideal place to hunt for undervalued energy stocks. Case in point: Vermilion Energy (NYSE:VET). The Calgary, Alberta-based company’s stock is up 90% this year and is trading at about $24. However, even with its run this year, VET stock still has an extremely low price-to-earnings ratio of 6.36.
Another reason to like VET stock is the fact that the company just hiked its quarterly dividend by 33% to $0.08 per share as part of its “Return of Capital” strategy. Vermilion also announced plans to return 25% of its free cash flow to shareholders in the second half of this year and up to 75% in 2023 through share buybacks and regular and special dividend payments. The company’s free cash has gotten a boost this year largely due to its European exposure. The ongoing energy crisis on the continent has pushed natural gas prices to multi-year highs. Vermilion said it plans to buy back one and a half million of its own shares each day during the second half of this year. Not too shabby.
Canadian Natural Resources (CNQ)
Another competitively priced northern energy company that is taking steps to reward shareholders is Canadian Natural Resources (NYSE:CNQ). The Calgary-headquartered company recently announced that it is paying a special dividend to shareholders after posting strong second-quarter financial results. Specifically, the company said it will pay a special dividend of $1.50 per share on Aug. 31 after its cash flow more than doubled in Q2, rising to $5.9 billion from $2.9 billion a year earlier.
Like most oil and natural gas producers, Canadian Natural Resources has seen its share price rise this year on the back of elevated energy prices. So far in 2022, CNQ stock has gained 27% to trade at $54.65 a share. However, it too has a very low P/E ratio of 7.25. The company also pays a quarterly dividend that currently yields 4.26%, or 75 cents a share. By way of comparison, the average dividend yield among companies listed on the S&P 500 index is 1.3%. And Canadian Natural’s stock is currently 30% below its 52-week high of $70.60 a share. Buy the dip!
Undervalued Energy Stocks: Enbridge (ENB)
Speaking of energy stocks that pay a monster dividend, check out Enbridge (NYSE:ENB). Another Canadian-based company, Enbridge is a little different than the other names on this list in that it specializes in pipelines that are used to transport oil, natural gas and natural gas liquids. A going concern since 1949, Enbridge today operates the biggest system of energy pipelines in North America, stretching from Canada’s northern oil patch all the way to the Gulf of Mexico. And stock dividends don’t come much bigger than the one offered by Enbridge, which currently yields 6.24%, or 86 cents a share.
The Calgary-headquartered company most recently posted a first-quarter profit of $1.93 billion as energy demand in Canada goes gangbusters. This spike in profit started after Russia invaded Ukraine and European nations started looking for alternative sources for their oil and natural gas. Enbridge’s Q1 revenues rose 24% to $15.1 billion from $12.1 billion a year earlier. The company’s earnings per share came in at 95 cents, much better than the 85 cents a share expected by analysts who cover the company. Year-to-date, ENB stock is up only 9%. However, that’s better than the broader market’s performance, and a P/E ratio of 22 makes the stock look competitively valued.
Looking beyond the Great White North, we come to San Ramon, California-based Chevron (NYSE:CVX). There are a couple of reasons for investors to consider buying CVX stock right now. First, while the share price remains up 30% on the year at $156.45 per share, it has come down 14% since peaking at a 52-week high of $182.40 in early June. Additionally, the stock looks undervalued with a P/E ratio of only 10.45 and a market capitalization of more than $300 billion. Lastly, Chevron’s quarterly dividend that yields 3.63%, or $1.42 a share, is attractive.
Chevron recently announced that its second-quarter profit more than tripled from a year ago to $11.6 billion as its revenue grew to $65 billion, compared with $36 billion a year ago. The blockbuster earnings led analysts across Wall Street to revise their forecasts and ratings on CVX stock, including Credit Suisse, which slapped an “outperform” rating on the stock, along with a $202 price target, implying a 30% upside from current levels. Chevron also boosted its share buybacks coming off its strong Q2 print.
Undervalued Energy Stocks: Occidental Petroleum (OXY)
Famed investor Warren Buffett is arguably the world’s best-known value investor. A relentless deal hunter, Buffett says he is always on the lookout for undervalued stocks, and, when he finds one, he buys shares with a vengeance. Well, Buffett seems to have found a deal in Houston, Texas-based Occidental Petroleum (NYSE:OXY). The Oracle of Omaha has been buying OXY stock hand over fist since the spring, bringing his total investment to 188.4 million shares, or 20.2% of the company, worth $11.3 billion. There is speculation that Buffett’s holding company, Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B), may eventually bid for all of Occidental Petroleum’s stock.
Buffett no doubt likes that OXY stock has more than doubled this year (up 107% since January) to $64.22 a share, making it one of the best-performing stocks in the S&P 500 index year-to-date. He also certainly likes Occidental Petroleum’s low P/E ratio of 6.31. While the quarterly dividend yields a skimpy 0.81%, Buffett probably likes that Occidental reinvests its profits in its business in the same way that Berkshire Hathaway does (Buffett’s company pays no dividend to shareholders). Also like Berkshire, Occidental Petroleum is using profits to buy back its own stock, announcing a $3 billion share repurchase program in this year’s second quarter.
British Petroleum (BP)
British Petroleum (NYSE:BP) is another oil producer whose stock shares many of the same attributes as the others on this list. BP stock is up 13% on the year at $30 per share but is currently 12% off its 52-week high of $34.30. It has an ultra-low P/E ratio of 4.69. And the stock pays a strong quarterly dividend that yields 4.66% or 36 cents a share. Based in London, England, British Petroleum is also one of the very biggest energy “supermajors” with annual revenues of more than $160 billion, 60,000 employees worldwide, and a market capitalization approaching $100 billion.
And like the other energy stocks on this list, British Petroleum recently hiked its dividend following blockbuster second-quarter earnings. The company announced that its Q2 net profit this year more than tripled to $8.5 billion from $2.8 billion a year earlier. It was the largest profit at the company in nearly 15 years, and the windfall led British Petroleum to announce that it is raising its quarterly dividend by 10% or an additional six cents per share going forward. The company also bought back $2.5 billion of its own stock during this year’s second quarter, further rewarding shareholders.
Undervalued Energy Stocks: Suncor Energy (SU)
We end as we began, with yet another Canadian energy company. Calgary-based Suncor Energy (NYSE:SU) is undervalued enough that it has attracted activist investor Elliott Management, which took a stake in the oil producer earlier this year and promptly called for changes at the company. To appease Elliott Management, which is run by hedge fund titan Paul Singer, Suncor announced in July that it will expand its board of directors and undertake a strategic review of its retail business, which includes 1,500 gas stations across Canada, with a view to selling that part of its business estimated to be worth about 11 billion CAD ($8.53 billion).
On July 8, Suncor Energy fired then CEO Mark Little, who was replaced on an interim basis by the executive vice-president for downstream operations Kris Smith. Mark Little’s departure came after Elliott Management raised concerns about safety and operational problems at Suncor, noting that there have been 12 fatalities at the company’s oil sites since 2014. In terms of its stock, Suncor Energy’s share price is up 25% year-to-date at $31.99 per share. It has a thrifty P/E ratio of 6.21 and a solid dividend that yields 4.56% or 47 cents a share per quarter. Between January and May of this year, Suncor bought back $1.3 billion of its common stock.
On the date of publication, Joel Baglole 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.