3 Energy Stocks to Buy in May

In the years since oil prices plunged from their $100-plus per barrel levels of 2014, many energy industry stocks have struggled -- but now, they may be set to rebound. Economic growth worldwide and Middle Eastern production cuts have resulted in a more than doubling of crude oil prices since early 2016; if they remain near current levels or head higher, now could be the perfect time to add Hess Corp. (NYSE: HES), Diamond Offshore (NYSE: DO), and Core Labs (NYSE: CLB) to your portfolio.

A growth stock in the making

Hess's ongoing development of 550,000 acres in the Bakken Shale and its 30% interest in ExxonMobil's (NYSE: XOM) massive 6.6 million-acre project offshore Guyana, which is forecast to begin producing in 2020, put it in a great position to profit from rising crude oil prices.

Last year, Hess embarked on a multiyear restructuring under which it will sell mature oil and gas production assets, and spin off of midstream assets in the Bakken shale to Hess Midstream Partners, a master limited partnership. The asset sales are providing financial firepower that it's using to invest in new oil and gas production, reduce its debt, and repurchase stock. A cost-savings program that's cutting $150 million per year in expenses is underway, too.

The company's investors are already benefiting from its new strategy. In the first quarter, Hess' operating expenses fell to $288 million from $358 million last year, it bought back $500 million worth of stock, and it retired $390 million of its debt.

It also produced more oil than expected. Thanks to a 12% jump in production from its Bakken Shale assets, companywide production was 233,000 barrels of oil equivalent per day (boepd) in Q1, exceeding the 220,000 boepd to 225,000 boepd range it forecast in February. Hess also plans to add two more rigs in the Bakken Shale later this year, and it wouldn't surprise me if growing production in the region allows it to overdeliver on its full-year target production range of 245,000 boepd to 255,000 boepd.

Looking further out, its project with ExxonMobil offshore of Guyana could be a game-changer. Hess says it can break even on that project at about $35 per barrel, and that the block could produce 500,000 boepd once it's pumping at full speed.

Given its growing Bakken production, lower costs, shareholder friendly buybacks, and a potential to profit from Guyana in a couple years, shares of Hess Corp. appear to be a smart bet.

Planning for a turnaround

The market for offshore drilling rigs has been horrendous since oil prices peaked in 2014, but a market bottom may be in. If it is, a pickup in demand could finally support higher rig day rates -- and profits -- at Diamond Offshore.

Diamond Offshore's Q1 financial performance showed few signs of a recovery in its business, but the situation could improve significantly if day rates rise, because 15 of the rigs in its have contracts that end in 2019 or 2020.

The company's Q1 conference call also provided some clues that better times may be ahead. While the company still has five cold-stacked rigs, including one that's held for sale, it did announce that Ocean Endeavor will return to service in 2019 for a minimum of two years in the wake of interest from three companies that wanted to contract it.

Management also said it's seeing increased interest from clients in fixed contracts that lock in today's day rates; that may signal that exploration and production companies are getting nervous, sensing that the next move in offshore rig day rates will be up, not down.

Furthermore, although there's 169 years of dynamically positioned floater supply available, and only 115 years of open demand for it in the next 12 months, the gap between supply and demand has shrunk since last year.

Admittedly, rig rates aren't likely to bounce back quickly, but if utilization perks up before it come time for Diamond Offshore to renegotiate contracts on its rigs in the coming year or two, the company could finally start moving its top and bottom lines in the right direction -- particularly since the company has more operating leverage thanks to the cost cutting efforts it undertook during the crude oil bear market.

There's always a market for innovation

As oil and gas markets improve, I expect exploration and production companies will increasingly embrace Core Labs' solutions to maximize their production and reduce their well costs.

We're already beginning to see that occur, and because Core Labs is an asset-light company, the trends are translating into substantial improvements in operating margin and profitability.

In Q4, revenue increased 14.9% year over year to $171.8 million, but operating expenses increased by only 8.9%. As a result, operating margin increased from 4 percentage points to 19% and net income skyrocketed 41% to $21.7 million.

It was a similar story in Q1, with revenue increasing 8.9%, operating margin improving by 4 percentage points to 19%, and net income ballooning 33% to $23.6 million. Core Labs' operating margin was 30% prior to the oil price collapse of 2014, so its profitability may have further room to improve.

Most of the demand for Core Labs' solutions is coming from land-based shale exploration and production, but offshore demand appears to be picking up. When asked about offshore activity during the Q1 conference call, Core Labs' management said it was seeing a broad improvement led by the Gulf of Mexico, South America (Brazil), and Guyana. In fact, Core Labs said that ExxonMobil and Hess Corp.'s Guyana project would be a source of revenue for the next 20 years.

With shale production continuing to climb and offshore markets starting to recover, I think there's a significant opportunity for earnings growth for Core Labs. For that reason, I feel it could be an even better buy now than Hess Corp. or Diamond Offshore.

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Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool recommends Core Laboratories. The Motley Fool has a disclosure policy.