The energy-stock sector soared more than 50% last year, but Morningstar still sees some bargains.
Whether you’re looking at the S&P 500’s 8% decline over the past year or its 12% rebound since October, you can argue that now may be a good time to buy stocks.
If you indeed think it is, one industry you might consider is energy stocks.
The energy sector soared more than 50% last year, as oil prices jumped in reaction to Russia’s invasion of Ukraine.
Energy stocks as a whole were 12% overvalued compared with Morningstar analysts’ fair-value estimates coming into 2023. But the firm still sees some bargains available in the sector.
Here are Morningstar’s top picks among undervalued energy stocks in alphabetical order.
Equitrans Midstream (ETRN) – Get Free Report, a natural gas pipeline company. Morningstar analyst Stephen Ellis assigns it a narrow moat (competitive advantage) and puts fair value for the stock at $14, twice recent trades at $7.14.
“Equitrans has one of the higher-quality revenue mixes in our coverage, as over 50% of its revenue comes from firm fixed-fee contracts that are take or pay, with average lengths of about 13-14 years,” he wrote in a commentary.
“The eventual completion of the Mountain Valley Pipeline and related efforts should boost [earnings before interest, taxes, depreciation and amortization] by 30% and increase the revenue associated with firm reservation contracts to over 70%.”
Bottom line: “The gathering and processing operations are some of the highest-quality [gathering and processing] assets in our coverage,” Ellis said.
It recently traded at $114, and even on Dec. 30, it stood at $110. So it’s unclear why Morningstar put Exxon on an undervalued stock list.
In any case, Exxon Mobil and Chevron each announced increased capital spending plans for 2023, Good wrote in a commentary.
“Exxon went a step further by increasing its share repurchase guidance,” he said. “Of the two, we continue to prefer Exxon, given its long-term growth outlook and ability to increase cash returns.”
The company “remains committed to oil and gas,” Good said. But also, “it has responded to calls to bring in more outside voices to its board and announced emissions reduction targets.”
TechnipFMC (FTI) – Get Free Report, a project services company for offshore oil development. Morningstar analyst Katherine Olexa assigns the company no moat and puts fair value for the stock at $15, 14% above a recent quote of $13.18.
She raised her fair-value estimate from $14 In November. That came after strong third-quarter earnings. Also, Olexa says “the long-awaited uptick in offshore oil and gas production will finally materialize over the next several quarters.”
Revenue growth will average 7% per year through 2026, she predicted. “Year to date, the firm’s total inbound orders total more than $6.2 billion, compared with $6 billion for all of 2021,” Olexa said in November.
“We expect demand for TechnipFMC’s services will remain elevated in the near term. Contracts are already being awarded for projects commencing in 2024 and beyond.”