- Energy stocks are in demand thanks to surging crude oil prices, which broke out to their highest level of 2023 on Tuesday.
- As such, I used the InvestingPro stock screener to search for undervalued energy stocks that possess solid fundamentals and strong upside.
- Below is a list of five leading energy stocks that are expected to provide some of the highest returns based on the InvestingPro models.
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- Tuesday’s Closing Price: $147.02
- InvestingPro Fair Value Estimate: $194.15
- Fair Value Upside: +32.1%
- Tuesday’s Closing Price: $116.74
- InvestingPro Fair Value Estimate: $153.38
- Fair Value Upside: +31.4%
- Tuesday’s Closing Price: $133.12
- InvestingPro Fair Value Estimate: $169.17
- Fair Value Upside: +27.1%
- Tuesday’s Closing Price: $53.50
- InvestingPro Fair Value Estimate: $63.04
- Fair Value Upside: +17.8%
- Tuesday’s Closing Price: $17.07
- InvestingPro Fair Value Estimate: $19.62
- Fair Value Upside: +14.9%
Energy stocks have been on a tear in recent weeks, with the latest boost coming from surging crude oil prices, which recently rose to their highest level of 2023 to around $87 per barrel.
In fact, U.S. crude has risen roughly 31% since June amid worries over tighter global inventories following fresh output cuts from Saudi Arabia and Russia.
The ongoing rally has sparked renewed bets that crude prices could once again reach the key psychological $100 per barrel mark - a level not seen since before the crash of late 2014.
As could be expected, the Energy Select Sector SPDR® Fund (NYSE:XLE) - which tracks a market-cap-weighted index of U.S. energy companies in the S&P 500 - is up 19% in the last three months to reach its highest level since January.
In comparison, the S&P 500 is up roughly 7% over the same timeframe.
With oil prices set to test new highs, here are five energy stocks well-positioned to extend their march higher through the end of the year due to their solid fundamentals, reasonable valuations, and high shareholder returns.
1. Marathon Petroleum
Marathon Petroleum (NYSE:MPC), a heavyweight in the oil and gas industry, boasts a strong presence in the refining and marketing sector. The Findlay, Ohio-based company, operates an extensive network of refineries, making it a key player in the downstream sector.
Marathon's ongoing focus on operational efficiency and strategic planning has allowed it to weather the ups and downs of the energy market.
In a sign of how well its business has performed amid the current environment, Marathon Petroleum delivered second-quarter profit and revenue blew past consensus expectations thanks to strong global refinery demand.
The company has now beaten Wall Street’s top-and-bottom line estimates for eleven consecutive quarters as it reaps the benefits of improving market fundamentals, rising global fuel demand, and strong energy commodity prices.
Source: InvestingPro
MPC stock, which touched an all-time high of $149.76 on August 11, is up 26.3% year-to-date. At current valuations, Marathon - which became the largest petroleum refinery operator in the U.S. following its acquisition of Andeavor in 2018 - has a market cap of $58.8 billion.
Despite its strong year-to-date performance, Marathon Petroleum’s stock is still undervalued according to the quantitative models in InvestingPro, making MPC an attractive option for investors.
Even with the recent upswing, shares could see an increase of 32.1% from Tuesday’s closing price of $147.02 as Marathon Petroleum is well positioned to capitalize on surging oil prices.
2. Phillips 66
Phillips 66 (NYSE:PSX) is another heavyweight in the energy sector, with diversified operations spanning refining, marketing, chemicals, and midstream. Its extensive portfolio provides stability and resilience even in challenging market conditions.
The Houston, Texas-based company's ongoing commitment to innovation and sustainability positions it for long-term growth, making PSX stock an appealing choice for investors amid rising oil and gas prices.
Phillips 66 has consistently generated robust cash flows, allowing it to increase its dividend payout for the last eleven years.
In addition to its growing dividend, the oil refiner is also attractive because of its inexpensive valuation. It trades at just 4.8 times forward earnings, a significant discount when compared to the broader market average.
Source: InvestingPro
PSX stock rose to a new 52-week high of $118.77 last night, its best level since November 2019, earning it a valuation of $52 billion. Its shares are up 12.2% year-to-date.
As per InvestingPro, investors have the chance to buy Phillips 66’s stock at a discounted price. The average ‘Fair Value’ price estimate for PSX stands at $153.38/share, implying a potential upside of 31.4%.
3. Valero Energy
Valero Energy (NYSE:VLO) is a leading refining and marketing company with a strong presence in both the U.S. and international markets. Its geographic diversity and operational efficiency enhance its ability to adapt to shifting energy market dynamics.
Valero's consistent dividend payouts and focus on shareholder value make it a compelling option for income-oriented investors. The energy company has maintained a streak of 35 consecutive years in which it has paid out an annual dividend.
All things considered, Valero’s healthy balance sheet, strong cash flows, and attractive valuation make it a solid name to own as crude oil and gasoline prices surge higher.
Source: InvestingPro
VLO stock, which reached an all-time high of $150.39 in late January, is up approximately 5% year-to-date. With a market cap of $47 billion, the San Antonio, Texas-based energy firm is one of the largest refinery companies in the world.
Currently trading at a bargain according to several valuation models on InvestingPro, Valero’s stock offers an affordable opportunity for investors seeking exposure to the energy sector.
The ‘Fair Value’ price target for VLO stands at about $169, a potential upside of 27.1% from the current market value.
4. Devon Energy
Devon Energy (NYSE:DVN) is a prominent shale oil and natural gas exploration and production company with a strong track record of successful resource development throughout the U.S. Permian basin.
As oil and gas prices soar, Devon's strategic assets and high-return projects are well-positioned for growth.
The company owns and operates key drilling assets in the oil-rich Delaware Basin, Eagle Ford, Powder River Basin, Anadarko Basin, as well as the STACK shale formation in Oklahoma.
It should be noted that the Oklahoma City, Oklahoma-based company has increased its dividend for five years in a row, a testament to its ongoing focus on shareholder returns.
Additionally, with a relatively low price-to-earnings ratio of 7.2, Devon’s stock comes at a discount when compared to some of its industry rivals, such as Occidental Petroleum (NYSE:OXY) (11.2), Pioneer Natural Resources (NYSE:PXD) (10.4), and EOG Resources (NYSE:EOG) (9.2).
Source: InvestingPro
DVN stock closed at a five-month high of $53.50 last night, earning the low-cost oil and gas producer a valuation of $34.3 billion.
Its shares are down 13% in 2023, though recent strength in oil and natural gas prices have led some analysts to forecast a recovery in Devon’s stock later this year.
Indeed, shares could see an upside of 17.8% from Tuesday’s closing price according to the quantitative models in InvestingPro, bringing DVN closer to its ‘Fair Value’ price of around $63.
5. Kinder Morgan
Kinder Morgan (NYSE:KMI) is one of the biggest energy infrastructure companies in North America. Its core business operations involve transporting crude oil, natural gas, and related products through its vast network of pipelines and terminals.
As such, the midstream company plays a pivotal role in the transportation and storage of oil and gas products. With energy prices on the rise, Kinder's extensive infrastructure network is set to see increased demand.
The Houston, Texas-based energy firm - which operates approximately 85,000 miles of pipelines and 152 terminals - is the largest U.S. independent transporter of refined petroleum products and of carbon dioxide, which positions it favorably in a market where efficient logistics are crucial.
In addition to its promising fundamentals, Kinder Morgan also offers investors an annual dividend payout of $1.13 per share at a sky-high yield of 6.59%, one of the highest in the midstream energy sector.
The energy pipeline giant has increased its dividend payout for five years in a row.
Source: InvestingPro
KMI stock, which is down around 5% in 2023, ended at $17.07 yesterday. At current levels, Kinder Morgan has a market cap of $38 billion.
It should be noted that the InvestingPro 'Fair Value' price projection for KMI is $19.62 per share, suggesting a prospective gain of 14.9% from Tuesday’s price.
Be sure to check out InvestingPro to stay in sync with the market trend and what it means for your trading decisions.
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Disclosure: At the time of writing, I am long on the Dow Jones Industrial Average via the SPDR Dow ETF (DIA). I also have a long position on the Energy Select Sector SPDR ETF (NYSE:XLE) and the Health Care Select Sector SPDR ETF (NYSE:XLV). I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and companies' financials. The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.