Energy Stocks Head Market Resurgence: 5 Value Picks

Stocks staged a broad rebound on Tuesday with energy stocks leading the day’s gainers. Fresh concerns about possible supply bottlenecks were the immediate catalysts for an increase in oil prices, which in turn pushed the sector’s stocks higher. Incidentally, energy shares have been weighed down of late, with the Energy Select Sector SPDR (XLE) down 9.5% over the last three months.

Now, analysts think that higher oil prices and strong earnings results can help the sector make a comeback. At the same time, prices of energy stocks largely lag their earnings and cash flow performances. This implies that there are several bargains to be had from the sector, making it an excellent time to invest in select oil value plays.

Share Price Recovery Taking Effect

During the first quarter of 2018, the Energy Select Sector SPDR, which represents energy shares included in the S&P 500, declined by 6.6%. These losses came on the back of a 3.8% decline for 2017. Of course, energy stocks rebounded in December and January even as oil prices moved toward the $70 per barrel mark.

But February’s correction triggered a new phase of losses for energy stocks. Only consumer staples and telecom stocks suffered more during the first quarter of 2018. However, a recovery seems to be occurring at this point. During March, the Energy Select Sector SPDR (XLE) gained 1.6% even as the S&P 500 lost 2.7% after major tech stocks suffered heavy losses.

The recent increase in oil prices is leading to the sector’s resurgence. Oil prices increased by 7.5% to $64.94 per barrel during the first quarter and are likely to sustain their momentum. Incidentally, oil prices have increased for six of the last seven months.

Earnings Prospects Remain Solid

During the fourth quarter, energy stocks posted the highest earnings growth among all the 11 sectors which make up the S&P 500. And this trend is likely to continue during the first quarter earnings season slated to begin shortly.

For the first quarter, energy sector earnings are expected to be up +60.8% from the same period last year on +15.7% higher revenues. Excluding the energy sector, total S&P 500 earnings growth drops from +15.8% to +14.4%. (Read: Handicapping the Q1 Earnings Season)

Sector Represents Excellent Value Proposition

Meanwhile, share prices of energy companies have failed to rise substantially despite steady increase in oil prices and strong earnings performances. This disconnect has given to rise to tremendous buying opportunities, creating incredible value propositions for those looking to invest in the sector.

A cursory look at sector valuations is enough to prove this point. The industry has an average one year trailing 12-month EV/EBITDA ratio – one of the best multiples for valuing oil and gas companies because these energy firms have a large amount of debt and EV (Enterprise Value) includes the parameter – of 7.45, which is below the S&P 500 average of 1.55.

This means that compared with the S&P 500, the broader sector is undervalued. This implies that the industry has the potential to gain in the near future. Hence, it might be a good idea to invest in stocks belonging to this industry.

Our Choices

Despite the occasional setback, oil prices have increased steadily for six of the last seven months. Earnings prospects for the sector also remain strong. Yet, share prices of energy companies have failed to keep pace with these developments, giving rise to incredible value propositions. 

Adding select value stocks from the sector to your portfolios looks like a good option at this time. Our selection is also backed by a good Zacks Value Score and Zacks Rank.

We narrowed down our choices with the help of our new style score system.

Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best opportunities in the value-investing space.

Mammoth Energy Services, Inc. TUSK is an integrated oilfield service company.

Mammoth Energy Services holds a Zacks Rank #1 (Strong Buy) and has a Value Style Score of B. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 7.30 lower than the industry average of 17.18.

CNOOC Limited CEO is a company that engages primarily in the exploration, development and production of crude oil and natural gas offshore China.

CNOOC has a Value Style Score of A. The stock has a P/E (F1) of 8.57x, lower than the industry average of 10.55. The stock has a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

Oasis Midstream Partners LP OMP is a master limited partnership company. It owns, develops, operates and acquires a diversified portfolio of midstream assets primarily in North America.

Oasis Midstream holds a Zacks Rank #2 (Buy) has a Value Style Score of A. The stock has a P/E (F1) of 9.51x, lower than the industry average of 13.18. It has a PEG ratio of 0.86, lower than the industry average of 1.69.

Exterran Corporation EXTN is involved in compression, production and processing products and services of the oil and natural gas industry.

Exterran holds a Zacks Rank #2 and has a Value Style Score of A. The stock has a P/E (F1) of 44.27x, lower than the industry average of 57.60.

China Petroleum & Chemical Corporation SNP or Sinopec, with its head office in Beijing, China, is one of the largest petroleum and petrochemical companies in Asia.

Sinopec holds a Zacks Rank #2 and has a Value Style Score of A.

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China Petroleum & Chemical Corporation (SNP) : Free Stock Analysis Report
 
CNOOC Limited (CEO) : Free Stock Analysis Report
 
MAMMOOTH ENERGY (TUSK) : Free Stock Analysis Report
 
Exterran Corporation (EXTN) : Free Stock Analysis Report
 
Oasis Midstream Partners LP (OMP) : Free Stock Analysis Report
 
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