With prices on the move, investors would be wise to look to undervalued energy stocks.
The recovery for oil has been robust and Brent currently trades at $120 per barrel. With the surge in energy prices, oil and gas exploration stocks have also been market out-performers.
An important point to note is that there are fears of a global recession in 2023. However, this factor has not translated into a correction for oil and gas. The key reason is geopolitical tensions being discounted in energy prices.
Further, the slowdown in the global economy is likely to be temporary. With renewed growth, demand for energy will remain strong. Considering the demand and geo-political factors, I believe that energy prices will remain high in the next few years.
Let’s therefore talk about four undervalued energy stocks that can deliver robust returns.
| RIG | Transocean | $4.59 |
| HP | Helmerich & Payne | $51.00 |
| LNDNF | Lundin Energy | $49.00 |
| EQNR | Equinor | $36.88 |
Transocean (RIG)
Several oil and gas exploration stocks have surged with Brent trading well above $100. However, there seems to be value in onshore and offshore drilling rig service providers.
In the offshore rig services segment, Transocean (NYSE:RIG) seems undervalued. Even after an upside of almost 50% for year-to-date 2022.
I believe Transocean has significant upside potential for two reasons.
First, the company has a robust order backlog of $6.5 billion. With a strong order intake in the recent past, there is clear cash flow visibility.
Second, new contracts are coming at a higher day rate. This will imply EBITDA margin expansion and cash flow upside in the coming years.
Transocean is also well-positioned from a financial perspective with a total liquidity buffer of $2.7 billion. With positive cash flows, the company expects to deleverage in the next few years.
It’s also worth mentioning that if demand remains robust, the cold-stacked rigs provide visibility for healthy revenue upside.
Helmerich & Payne (HP)
Helmerich & Payne (NYSE:HP) is another name among undervalued energy stocks worth adding.
The onshore drilling rig services provider has ample headroom for revenue and cash flow upside in the next few years.
As of April 2022, the company reported a fleet of 271 rigs. However, only 168 rigs were contracted.
The percentage of contracted rigs has been trending higher in the last few quarters. With Brent well above $100 per barrel, contracting activity is likely to remain robust. Therefore, Helmerich & Payne has clear revenue and cash flow upside visibility.
Another reason to like the stock is the fact that the company is gradually building an international presence. With a quality fleet of super-specification rigs, the company is positioned to gain market share.
Helmerich & Payne is also attractive from a balance sheet perspective. As of March 2022, the company had a total liquidity buffer of $1.0 billion.
Lundin Energy (LNDNF)
Lundin Energy (OTCMKTS:LNDNF) has been trending higher in the last few quarters. However, I believe that there still is more upside for this hidden gem energy stock.
As an overview, Lundin Energy is focused on the Norwegian Continental Shelf. Organically and through acquisitions, the company has some high-quality assets. Importantly, the assets have a low break-even, which makes the company’s business a cash flow machine.
Lundin has one billion barrels of reserves and resources. The company plans to achieve production of 200 million barrels of oil equivalent per day (mboped) by 2023. The long-term target is to increase production to 525 mboepd by 2028.
Even if oil averages $80 to $90 per barrel in the next five years, Lundin will be positioned to generate incremental cash flows. There also seems to be clear visibility for dividend growth since the company has an investment-grade balance sheet.
For Q1 2022, Lundin reported operating cash flow of $1.0 billion. This implies an annualized OCF potential of $4.0 billion. Clearly, with high financial flexibility, Lundin Energy is positioned for aggressive investments and sustained growth.
Equinor (EQNR)
Equinor (NYSE:EQNR) seems like another quality pick from the Norwegian Continental Shelf. The 2.1% dividend yield stock has quality assets and seems positioned for long-term value creation.
Stocks like Chevron (NYSE:CVX) and Marathon Oil (NYSE:MRO) are already in the limelight, so it makes sense to wait for some correction before any fresh exposure to these stocks.
I also prefer to look at oil and gas stocks with a low break-even. Last year, Equinor guided for free cash flow of $45 billion between 2021 and 2026. This was assuming a scenario where oil trades at $60 per barrel.
Currently, Brent is at $120 per barrel. Even if an average price of $90 per barrel is considered through 2026, Equinor is positioned to report free cash flow of approximately $70 billion. This leaves ample scope for value creation through dividends and share repurchase.
Additionally, the financial flexibility will allow Equinor to achieve its ambitious target of investing in renewable energy. Therefore, even after an upside of 60% in the last 12-months. EQNR stock looks attractive.
On the date of publication, Faisal Humayun 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.