Energy stocks appeal to investors for a few different reasons.
- Energy stocks tend to perform independently of other types of stocks. As a result, investors buy energy stocks to diversify their portfolios.
- Many energy stocks offer attractive yields and therefore appeal to investors who like high-dividend stocks.
- Energy stocks provide investors with a way to play rising oil prices.
- Energy stocks can help hedge against inflation as oil and gas prices typically rise during inflationary periods.
During the trailing one-year period, the Morningstar US Energy Index returned 15.29%, while the Morningstar US Market Index returned 27.50%.
The energy stocks that Morningstar covers look 7.6% undervalued today.
To come up with our list of the best energy stocks to buy now, we screened for:
- Energy stocks that earn narrow or wide Morningstar Economic Moat Ratings. We think companies with narrow moat ratings can fight off competitors for at least 10 years; wide-moat companies should remain competitive for 20 years or more.
- Energy stocks that are undervalued relative to the average stock in the sector, as measured by our price/fair value metric.
5 Best Energy Stocks to Buy
The stocks of these energy companies with economic moats were the most undervalued according to our metrics as of July 9, 2024.
- SLB SLB
- HF Sinclair DINO
- Devon Energy DVN
- TC Energy TRP
- Exxon Mobil XOM
Here’s a little more about each of the best energy stocks to buy, including commentary from the Morningstar analysts who cover them. All data is as of July 9, 2024.
SLB
- Morningstar Price/Fair Value: 0.77
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Forward Dividend Yield: 2.38%
- Industry: Oil and Gas Equipment and Services
SLB tops our list of the best energy stocks to buy now, with shares trading at a 23% discount relative to our $60.00 fair value estimate. As the world’s largest oilfield services provider, it benefits from a strong balance sheet and high exposure to non-US markets. SLB offers a 2.38% forward dividend yield and a narrow economic moat rating.
SLB, formerly known as Schlumberger, is the largest oilfield services provider in the world, with a product portfolio that addresses nearly every end market in the industry. The firm has developed an impressive reputation as one of the leading innovators in oilfield services. Roughly 20% of its annual revenue comes from new technology, and the efficiency gains well operators realize through SLB’s services have earned the firm dominant market share in several categories, including wireline services, production testing, and logging-while-drilling.
Moving forward, SLB is targeting integrated services and digital solutions. Its Asset Performance Solutions business allows well operators to completely outsource project management to SLB. APS increases operational efficiencies for all parties by reducing informational friction and time delays that tend to occur when contracting project stages to different service firms. The end result is reduced project costs and quicker time to production. SLB’s DELFI ecosystem also represents significant opportunities for margin expansion by providing an asset-light, highly scalable software platform that improves project efficiency while augmenting SLB’s already-impressive knowledge base.
The firm also aims to localize its expertise through its “fit-for-basin” approach. SLB intends to deepen relationships with its customers by creating solutions tailored to regional or individual customer requirements. The firm aims to develop technology with high in-country value that solidifies SLB’s international market access in the long run. We expect the recent Champion deal and its strong production chemicals position to help with all these goals.
HF Sinclair
- Morningstar Price/Fair Value: 0.78
- Morningstar Uncertainty Rating: Very High
- Morningstar Economic Moat Rating: Narrow
- Forward Dividend Yield: 4.00%
- Industry: Oil and Gas Refining and Marketing
HF Sinclair is 22% undervalued relative to our $64 fair value estimate. This top energy stock has among the lowest net debt of its peer group. HF Sinclair yields 4.00% and earns a narrow moat rating.
After the acquisition of Sinclair Oil, HollyFrontier, now HF Sinclair, is a fully integrated independent company composed of refining, marketing, renewables, specialty lubricants, and midstream businesses.
Its refining footprint has grown to seven refineries totaling 678 mb/d in total capacity, including the recently acquired Puget Sound refinery. The latter deal extends the company’s footprint to the West Coast, beyond its historical midcontinent and Rockies roots and into a more difficult refining market with less competitive advantages. However, the foothold in the West Coast should help with the growing renewable diesel business given the region’s growing biofuel mandates.
The Sinclair acquisition extends HF’s push into renewable diesel, adding a production facility and pretreatment project. Combined with HF’s existing projects (two RD units and a pre-treatment unit), it now can produce 380 million gallons annually and expects future growth.
Adding Sinclair’s marketing group of over 300 distributors, 1,500 wholesale brand sites, and 2 billion gallons a year of branded sales adds a stable earnings stream HF previously lacked as a merchant refiner. In addition, it offers the ability to generate RINs whose high costs have put HF at a disadvantage in the recent past.
HF Sinclair had already begun to diversify its earnings when it acquired the Petro-Canada lubricants business, Red Giant Oil, and Sonneborn to diversify its earnings stream. It expects the segment to generate $250 million EBITDA annually while also serving as a platform for future growth.
At the same time, HF added Sinclair’s midstream assets including 1,200 miles of pipelines, eight product terminals with 4.5 mm/b of storage, and interests in three pipeline joint ventures. The incremental EBITDA of $70 million-$80 million will increase total midstream segment annual EBTIDA to about $450 million while opening up future organic and external transaction growth opportunities.
Devon Energy
- Morningstar Price/Fair Value: 0.79
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Narrow
- Forward Dividend Yield: 4.41%
- Industry: Oil and Gas Exploration and Production
The only exploration and production company on our list, Devon Energy is next among our best energy stocks to buy. This stock looks 21% undervalued compared with our $59 fair value estimate. Devon earns a narrow moat rating, and its stock yields 4.41%.
In 2018, Devon embarked on a series of shrewd capital allocation moves that saw it sell its Enlink Midstream interest, divest its Canadian heavy oil and Barnett Shale interests, and merge with WPX. These astute steps allowed Devon to recycle cash by shedding interests that were either noncore or higher on the cost curve. Recycled cash allowed Devon to meaningfully pivot toward the Delaware and enjoy newfound exposure in the Bakken. Previously, both Canadian Heavy Oil and Barnett Shale made up 40%-50% of its production.
Today, Devon is among the lowest-cost providers on the US shale cost curve, along with Diamondback Energy and EOG Resources. Devon’s reconstituted portfolio is buoyed by its presence in the Delaware, which supplies some of the lowest breakeven costs among US basins. About two thirds of Devon’s production is tied to this premier asset, which helps Devon command favorable well production relative to peers. We expect management to continue allocating capital to this basin—it’s already signaled that over 60% of its roughly $3.6 billion in capital expenditure will be allocated to it in 2024.
That said, Devon is more than just a single basin play. In fact, Devon boasts a meaningful presence in four of the top five US shale basins by lowest breakeven costs. These include the Williston, the Eagle Ford, and the Anadarko Basins. Exposure to high-quality assets with a near 17-year remaining inventory life, coupled with operational improvements from initiatives like longer laterals, should allow Devon to enjoy modest production growth. Importantly, we expect production gains will come at increasingly attractive drilling and completion costs.
Finally, we think Devon completed its reset with its revised capital allocation framework in late 2020. That framework was the first to implement a fixed plus variable dividend; its shareholder orientation was warmly received by the market. In 2024, Devon’s capital allocation framework calls for returning 70% of its free cash to shareholders. While capital returns still favor the dividend, the bias has somewhat shifted toward buybacks. We’re less enthused by this given Devon’s 2024 valuation relative to market pricing.
TC Energy
- Morningstar Price/Fair Value: 0.80
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Narrow
- Forward Dividend Yield: 7.48%
- Industry: Oil and Gas Midstream
TC operates natural gas, oil, and power generation assets in Canada and the US. This cheap stock trades 20% below our fair value estimate of $47.00. It yields 7.48% and carries a narrow moat rating.
TC Energy faces many of the same challenges as Canadian pipeline peer Enbridge but also offers important contrasts. Both firms offer a 5%-7% growth profile and a utilitylike 95%-98% of earnings that are highly regulated or contracted, with several years of project backlog, despite Enbridge largely focusing on oil assets, while TC’s focus is natural gas. However, we also anticipate that any major new pipeline project for either firm will face substantial stakeholder challenges from a legal, regulatory, or community perspective, raising the risks and costs. We see this in the rather painful Coastal GasLink project for TC Energy, where capital costs have soared.
The most critical differences between Enbridge and TC Energy arise from their approaches to energy transition. Canadian carbon emissions taxes are expected to increase to CAD 170 a ton by 2030, meaning it is critical that TC Energy, with its natural gas exposure, follow Enbridge’s approach to rapidly reduce its carbon emission profile and continue to pursue projects like the Alberta Carbon Grid, which will be able to transport more than 20 million tons of carbon dioxide. These taxes potentially increase costs for Canadian pipes compared with US pipes but also make hydrogen a viable alternative to gas-powered electricity generation by 2030 in Canada, presenting an emerging threat. TC Energy recently introduced targets to reduce its Scope 1 and 2 intensity by 30% by 2030 and reach net zero by 2050, which is a start.
While we think the renewables business lacks an economic moat today, we think it is an important area of investment for TC Energy that it needs to pursue. The renewables investments can compete for capital across the rest of the portfolio, generating reasonable returns on capital, allowing the overall enterprise to adapt to the markets as they evolve. As a result, we expect TC Energy’s Bruce Power business to be a critical area of investment going forward. The spinoff of the liquids business (South Bow) in the latter stages of 2024 can facilicate a capital reallocation effort across TC Energy’s businesses in a positive fashion, in our view.
Exxon Mobil
- Morningstar Price/Fair Value: 0.81
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Forward Dividend Yield: 3.39%
- Industry: Oil and Gas Integrated
Exxon Mobil closes our list of the best energy stocks to buy now. This narrow-moat oil and gas integrated company offers a 3.39% dividend yield. Exxon Mobil trades 19% below our fair value estimate of $138 per share.
While many of its peers are diverting investment to renewables to achieve long-term carbon-intensity reduction targets, ExxonMobil remains committed to oil and gas. It has responded to calls to bring in more outside voices to its board and announced emission-reduction targets. It’s also investing in low-carbon technologies, but these efforts are measured and keep oil and gas production at the core. While this strategy is unlikely to win praise from environmentally oriented investors, we think it’s more likely to be more successful and probably holds less risk.
The end of oil is likely to occur, but not anytime soon. Gas is likely to have an even longer life due to the relative attractiveness of its emissions intensity and the need to supplement intermittent renewable power. These trends and growing demand for chemicals are what drive Exxon’s investment strategy and will likely deliver superior returns.
To satisfy investors, Exxon capped spending with guidance of $20 billion-$25 billion a year for 2023-27, which should keep the dividend safe at $40/barrel. However, earnings should still grow with plans to double earnings and cash flow from 2019 levels by 2027. Meanwhile, the dividend break-even should fall to $30/bbl, thanks to structural cost efficiencies and high-margin new projects. This guidance excludes Pioneer Natural.
Production will grow modestly through 2027, but portfolio profitability is set to improve due largely to high-margin Guyana volumes backfilling declines in North American dry gas production and lower-value divestments. Exxon's high-quality Permian position, further bolstered with the addition of Pioneer Natural Resources, affords it capital flexibility and generates free cash flow, and should reach 2.0 mmboe/d by 2027.
Exxon’s downstream and chemical segments have suffered from decade-low industry margins in the past, but market conditions are reverting to or surpassing midcycle levels, boosting near-term earnings. Investments are focused on producing higher-value lubricants and diesel in its downstream segment and performance products in its chemical segment, which should lift midcycle returns and earnings capacity.
4 New Stocks to Buy with Catalysts for Future Gains
Plus a preview of bank earnings and how to invest this quarter.
32m 22s
How to Find More of the Best Energy Stocks to Buy Now
- Review Morningstar’s comprehensivelist of energy stocks to investigate further.
- Explore the insights available in our Energy sector overview.
- Use the Morningstar Investor screener to build a shortlist of energy stocks to research and watch.
- Read the latest news about notable energy stocks from Morningstar’s Stephen Ellis and Katherine Olexa.
The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.
