Energy sector investment looks like a great sector for those seeking value stocks. Even though the price of Brent crude oil — the international benchmark price — has jumped 40% this past year and is above $75 per barrel, the Energy Select SPDR ETF is up less than 17% over that time frame. This could indicate that Wall Street is undervaluing oil and gas stocks and that it might be a good opportunity to buy now.
Here’s a look at three companies to watch this quarter: rig company Helmerich & Payne (NYSE:HP), pipeline company Enbridge (NYSE:ENB), and liquefied natural gas company Tellurian (NASDAQ:TELL).
Dividend Yield & Strong Demand Forecast
The oil consolidation that started in mid-2014 hurt demand for Helmerich & Payne’s drill rigs. Its active rig count in the onshore U.S. market, its most important segment, fell drastically from 297 in the first quarter of fiscal 2015 to 87 just a year and half later.
Making things worse, Helmerich & Payne has a track record of ensuring that its fleet of rigs is at the leading edge of the industry. That means spending cash on upgrades, which it did even while demand was weak. That capital spending increases costs, most importantly depreciation.
Now that need for drilling rigs is jumping again, and the company’s rig fleet is well advanced in the upgrade process, Helmerich & Payne is increasing market share as its rigs get back to work. Its active fleet is back up to 227. It has also seen the prices it can charge start to move higher. Management is justifiably optimistic, with analysts, on average, calling for a solid uptick in earnings over the next year.
Lots Of Progress But Still Undervalued?
The stock price of Canadian energy infrastructure leader Enbridge has lost 15% of its value over the past year. That drop comes even at a time when the company has made better-than-expected advancements on its strategic plan. That makes the stock a compelling bargain to consider buying this month, especially considering the growth it has coming down the pipeline.
Heading into 2018, Enbridge expects that it could grow earnings 15% this year and at a 10% compound annual rate through 2020, fueled by the roughly USD$15.3 billion of expansion jobs it had under construction. Additionally, the company expects to sell about USD$2.3 billion in noncore assets by year’s end, which would bump up its leverage ratio to a more comfortable 5.0 times debt to EBITDA.
Even with that progress, shares of Enbridge currently sell for just 10.5 times free cash flow, which is well below the 12.5 times average of its pipeline peers. Add that ultra-cheap price to the company’s 6%-yielding dividend and compelling growth prospects, and Enbridge is one of the top energy stocks to buy this month.
New Catalyst For This Energy Play?
Tellurian is a stock what could have strong potential over the next few years. Even though the company’s business plan has yet to make it off the ground, the basics are there for Tellurian to create a liquefied natural gas export terminal over the next several years. One thing that could make this stock so interesting is the fact that so much of the company’s outlook will be decided over the next few months.
Tellurian is searching for a new way to get a facility off the ground in the U.S. Previously, companies like Cheniere Energy marketed long-term takeaway contracts to customers that locked them into relatively low prices and removed commodity price risk for the exporter. Companies then used those contracts as a proof-of-concept that enabled them to go to the market for funding, mostly in the form of debt.
Obtaining that permit and announcing its equity partners in the project are two major catalysts that will determine much of its future. If both of these things happen in the next six months, then we can expect Tellurian to get the green light to build its facility. These two events could mean big things for this stock and getting in now could mean big returns for investors.