Energy was the top performing sector in March and the run is far from over. From an allocation perspective, energy stocks are under-owned and could gain further ground as flows to the sector increase.
There are several reasons to own energy stocks. First, demand has surprised to the upside, surpassing consensus expectations. Even the U.S. Energy Information Administration (EIA) expects global oil demand to increase by 1.4 million barrels per day in 2024 and 2025.
Secondly, geopolitical tensions have flared up, especially in the Middle East. As a result, Brent crude oil prices have moved higher, exceeding $90 in the past week. These rising prices will buoy energy stocks.
Analysts will likely raise estimates for energy stocks as oil appreciates making the sector compelling. Furthermore, the sector is still the most undervalued at under 12 times forward earnings. These three energy stocks have strong buy ratings and are attractive bargains.
ConocoPhillips (COP)
As one of the largest U.S.-focused exploration and production companies, ConocoPhillips (NYSE:COP) is one of the top energy stocks to buy. It’s an analyst favorite with 20 buy and no sell ratings.
This energy giant has an oil portfolio with unmatched depth and quality. Its Lower 48 portfolio in the Permian provides a stable production base. In Alaska, it has a high-margin legacy business and project Willow — a 600 million-barrel resource that’s in development. International assets in Canada, Qatar, Norway, Libya and Asia Pacific round up the diversified portfolio.
Due to its low cost of supply, ConocoPhillips is among the top energy stocks. It has approximately 20 billion barrels equivalent with an average supply cost of $32. These high-quality assets guarantee that ConocoPhillips can maintain its current production levels for 30 years.
Furthermore, it has capitalized on the energy transition by developing a robust liquified natural gas (LNG) portfolio. Qatargas 3 is a key asset in supplying LNG to the Asian and European markets. Moreover, the company is expanding its LNG business in Qatar with North Field South and North Field East.
At $60, West Texas Intermediate management expects to generate $115 billion in free cash flow available for distributions in the next 10 years. That means the company will return more than two-thirds of its market capitalization to investors in 10 years.
Cheniere Energy (LNG)
Cheniere Energy (NYSE:LNG) is one of the largest exporters of liquefied natural gas in the U.S. It operates liquefaction plants and supplies LNG to Europe and Asia.
As of this writing, Cheniere Energy is among the most well-positioned energy stocks to benefit from LNG adoption. Indeed, as the world shifts from dirty power sources like coal, demand for natural gas across Europe and Asia is growing. Shell (NYSE:SHEL) expects LNG demand to grow by more than 50% by 2040 due to accelerating industrial coal-to-gas switching, especially in Asia.
Already, due to surging demand from Asia and sanctions on Russian gas, the U.S. has become the top global exporter of LNG. Cheniere supplies natural gas through its facilities, delivering 637 cargoes in 2023. 73% of that supply was delivered to Europe.
Looking ahead, the company is progressing on expansion projects like Corpus Christi Stage 3 to increase export capacity. Ahead of completing these export terminals, management has already signed long-term agreements with counterparties in Europe, Canada and Asia.
In 2023, Cheniere generated an adjusted EBITDA of $8.8 billion and a net income of $9.9 billion. Coal-to-gas switching and gas-fired power plants to backstop intermittent renewables will continue to drive demand. This energy company has a crucial role — delivering U.S. LNG to the global energy market.
Enterprise Products Partners (EPD)
Among energy stocks, this pipeline, storage facilities and export terminal operator has some of the most unique assets. Enterprise Products Partners‘ (NYSE:EPD) pipelines link every major shale region and most refineries east of the Rockies. It also owns export facilities on the Gulf Coast.
The company’s assets include over 50,000 miles of natural gas and crude oil pipelines in Texas, New Mexico, Oklahoma and Louisiana. These pipelines connect various demand points and the more than 300 million barrels of liquid storage capacity it owns. It also has a petrochemical unit that converts hydrocarbons into high-margin products for export.
Enterprise Products Partners generates significant cash flows through its extensive network of pipelines, processing plants, storage and export facilities. Typically, contracts to reserve capacity are 15-20 years long. Furthermore, through its marketing operations, it owns inventory and leverages its system to profit from price differentials across markets.
These unique assets generate tremendous cashflows, which the company distributes to shareholders. In 2023, it generated adjusted FCF of $4.8 billion and returned $4.5 billion to shareholders. EPD stock yields 6.9% and analysts love the stock with 15 buy and 5 overweight ratings.
On the date of publication, Charles Munyi did not hold (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.
