‘Cheap’ energy stocks: Morningstar strategists pick 5 stocks to buy as oil prices slide

Rising geopolitical tensions have caused volatility in crude prices, but one strategist is eagerly looking for opportunities in the energy sector. It was a laggard last year, but things have improved and many stocks are now trading near all-time highs Stephen Ellis, energy and utilities strategist at Morningstar Inc., said volatility in the oil market poses challenges and calls for investor patience, which “usually pays off in the energy space.” On April 19, Ellis told CNBC Pro: “When oil prices go down like in 2020, or the market takes a more negative outlook, we generally get more excited about energy stocks because that’s when we find the most attractive stocks—returns and bargains.” He said there were “picky bargains” in the market. Meanwhile, oil futures posted losses last week as concerns that a wider conflict in the Middle East could disrupt crude supplies faded. On April 22, Brent crude was trading at around $86.50, down 4.4% over the past five days. ‘Quality’ stocks in energy Ellis says he looks for quality stocks when selecting stocks in the energy sector. His top picks include Canadian pipeline and energy company Enbridge, oilfield services company SLB, natural gas company TC Energy and energy giants APA and ExxonMobil. “These are all ‘moat’ companies that have had some upside to their fair value estimates even during periods of high oil prices,” Ellis explained, adding that stocks with wide “economic moats” are seen as having a sustainable competitive advantage. Enbridge He described Enbridge as “a rare opportunity to acquire a company that long-term investors like at a discount.” The company recently raised its dividend for the 29th consecutive year, increasing the quarterly dividend by 3.1% to 9.50 cents per share. It pays an annual dividend of $3.66 per share. Morningstar’s stock has a fair price estimate of C$56 ($41), a potential upside of about 16.7%. TC Energy SLB Morningstar has a four-star rating on TC Energy and a fair price estimate of $47, down about 4.2%. Investment research firms give stocks one- to five-star ratings, with the highest rating indicating the stock is undervalued. SLB (formerly Schlumberger) also has a four-star rating. “We remain optimistic about SLB’s long-term prospects, as companies rely on oil and gas for energy security, so the next five years provide stable opportunities for SLB,” Ellis said. Morningstar shares have a fair value of $62, a potential upside of about 24.3%. As for ExxonMobil, it gives it a three-star rating and a fair value estimate of $133, representing an upside potential of about 11%. Ellis said an opportunity for the company is its commitment to oil and gas, even as many of its peers are shifting investments toward renewable energy. “It responded to calls to bring more outside voices on board and announced emissions reduction targets. It has also invested in low-carbon technologies, but these efforts have been measured and are at the core of oil and gas production,” he explains. “While this strategy is less likely to garner praise from environmentally oriented investors, we believe it is more successful and potentially less risky. ExxonMobil’s investment strategy will deliver strong returns elsewhere in the energy sector, Ellis likes APA.” . He called it “significantly undervalued” and argued that “the market is deeply skeptical about its prospects in Suriname, but I don’t think the share price reflects any success in Suriname,” referring to the South American country’s exploration project. “This situation effectively means that investors will benefit from free development This is a very attractive feature as we don’t have to depend on oil or gas prices in the short term and the stock has the potential to deliver very healthy returns. ” said Alice.