Energy Stocks Look Cheap, But What Should I Buy?

Today,
around
31%
of
the
energy
stocks
covered
by
Morningstar
are
trading
at
a
17%
discount
rate
compared
to
fair
value.
That
means
there
are
plenty
of
investment
opportunities
in
the
energy
sector,
even
among
quality
companies.

What’s
The
Deal
With
Iran?

If
there
are
opportunities
out
there,
though,
why
are
investors
selling?

One
reason
is
concern
about
oil
demand
expectations
in
the
short-term.
According
to
Morningstar
analysts,
lower
demand
for
gasoline
will
have
a
negative
impact
on
oil
demand
in
2024,
and
this
is
due
mainly
to
lower
consumption
in
the
US.
The
US
Energy
Information
Administration
estimates
for
2024
oil
demand
is
at
its
lowest
for
20
years.

There
are
several
reasons
that
explain
this
data:
an
increase
in
remote
working
for
one;
improving
car
energy
efficiency;
the
adoption
of
electric
vehicles;
and
higher
oil
prices.
On
top
of
that,
Chinese
demand
is
not
sufficient
to
compensate
for
lower
oil
consumption
in
North
America,
right
now.
Its
own
economy
is
threatened
by
deflation
and
by
a
real
estate
crisis.

The
other
main
concern
is
about
the
supply
side.

“Going
into
the
third
quarter
[of
2023],
the
market
was
extremely
concerned
about
oil
supply
running
out
after
the
2.3
million
barrels
per
day
reduction
in
global
oil
reserves,”
says
Stephen
Ellis,
equity
strategist
for
Morningstar.

“But
in
the
fourth
quarter
expectations
are
for
an
increase
in
oil
reserves
compared
to
the
previous
three
months.
Furthermore,
the
contributions
to
supply
by
Venezuela
and
Iran
are
now
clearer.

“We
believe
Venezuela
is
one
of
the
few
regions
that
has
the
potential
to
increase
oil
production
and
to
ease
the
current
supply
crisis,”
Ellis
adds.

“In
this
sense,
diplomatic
activity
by
the
US
and
the
European
Union
seems
to
be
bearing
fruit.
Recently,
the
Venezuelan
government
announced
an
agreement
with
opposition
groups
to
hold
the
elections
in
2024.

“In
exchange,
the
US
is
suspending
restrictions
on
Venezuela’s
trade
in
gold,
oil
and
bonds,
and
the
EU
is
accelerating
its
process
of
reviewing
sanctions
against
Caracas
(from
every
12
to
every
six
months)
so
that
they
can
be
suspended
more
easily”.

With
Iran,
furthermore,
investors
were
concerned
about
the
potential
involvement
of
Tehran
in
the
Israeli-Hamas
conflict,
but
to
date
that
has
not
occurred.
If
the
status
quo
holds,
Morningstar
analysts
say
there
should
be
no
repercussions
for
crude
oil.
Iran
will
remain
a
special
observer,
however,
as
one
the
few
countries
capable
of
increasing
the
global
oil
supply.

What’s
Happening
to
The
Gas
Market?

When
it
comes
to
gas,
Morningstar
analysts
believe
investors
continue
to
focus
on
meaningful
variables,
and,
in
particular,
potential
interruptions
to
gas
supply,
a
sharp
drop
in
temperatures
during
winter
months,
and
the
possible
repercussions
of
the
Israeli-Hamas
war.

“Up
to
now,
EU
gas
stock
levels
are
essentially
100%
full
and
so
Europe
will
be
able
to
cope
with
the
winter,”
Ellis
says.

“Despite
this,
EU
gas
prices
and
spreads
have
continued
to
be
volatile.
In
our
opinion,
the
impact
of
the
current
tensions
in
the
Middle
East
on
the
gas
market
are
irrelevant,
but
we
anticipate
that
the
gas
price
will
continue
to
be
volatile
until
the
end
of
2024,
when
the
new
supply
of
liquefied
natural
gas
from
the
US
will
be
added.”

Where
Are
The
Investment
Opportunities
in
Energy?

Name:
Exxon
Mobil

Ticker:
XOM

Morningstar
Rating:
4
Stars

Fair
value
estimate: $123
(£97.19)

Exxon
has
lost
over
7%
year
to
date
(as
of
14
December
2023
in
EUR)
and
is
discounted
about
20%
compared
with
its
fair
value
of
$123
(report
updated
as
of
8
December
2023).

By
2027,
Exxon
expects
to
double
profits
and
cash
flows
from
those
recorded
in
2019
thanks
to
the
combination
of
three
factors:
structural
reduction
of
operating
costs,
improvements
in
the
asset
portfolio
and
revenue
growth.

Over
the
course
of
the
past
quarter,
the
company
achieved
its
$9
billion
cost
savings
target
ahead
of
schedule,
it
paid
$3.7
billion
in
dividends
and
repurchased
$4.4
billion
in
stock.
It
also
raised
its
fourth-quarter
dividend
by
4%,
to
$0.95.
It
plans
to
repurchase
about
$17.5
billion
in
shares
in
2023.

Name:
Equitrans
Midstrean

Ticker:
ETRN

Morningstar
Rating:
4
Stars

Fair
value: $15

Although
Equitrans
Midstrean
rose
54%
since
the
beginning
of
the
year
(as
of
14
December
2023
in
EUR),
the
stock
is
still
discounted
about
30%
compared
to
its
fair
value
of
15
USD
(report
updated
to
1
December
2023).

The
Mountain
Valley
Pipeline
project
is
getting
closer
to
commissioning
and
will
result
in
a
significant
improvement
in
the
company’s
bottom
line.
Morningstar
analysts
expect
about
$390
million
in
incremental
EBITDA,
which
would
be
roughly
a
40%
increase
over
Equitrans’s
2023
EBITDA
of
around
$1
billion.

They
also
consider
the
MVP
can
be
expanded
500
million
cubic
feet
per
day
for
very
little
cost,
which
would
add
an
incremental
$55
million
in
EBITDA.

Title:
APA

Ticker:
APA

Morningstar
Rating:
4
Stars

Fair
value:
56
USD

APA
is
active
in
the
oil
and
gas
exploration
and
production
industry.
The
company
operates
primarily
in
the
US,
Egypt,
the
North
Sea
and
Suriname,
and
its
proven
reserves
stood
at
890
million
barrels
of
oil
at
the
end
of
2022.
APA
has
large
drilling
opportunities
in
the
Permian
Basin,
which
will
allow
the
company
to
increase
production
at
low
costs.

But
it’s
the
asset
in
Suriname
that
best
represents
a
potential
turning
point
for
APA,
as
it
could
allow
the
company
to
double
its
production
in
the
next
10
years.
The
stock
is
down
23%
since
the
beginning
of
the
year
(as
of
14
December
2023
in
EUR).
It’s
now
discounted
by
approximately
40%
compared
to
its
fair
value
of
56
USD
(report
updated
as
of
2
November
2023).

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