3 Incredibly Cheap Energy Stocks

MarketsMotley Fool

The energy space is broad and diverse, with some areas doing well and others poorly. Right now, oil and gas-related names are still facing headwinds, which has opened up opportunities for investors interested in financially strong dividend-paying companies. Three that deserve your attention today are integrated energy giant ExxonMobil (NYSE: XOM), drilling services provider Helmerich & Payne (NYSE: HP), and midstream limited partnership Magellan Midstream Partners (NYSE: MMP).

1. Still looking pretty cheap

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Exxon's stock is up 6% so far in 2019, but down 13% from the highs it reached earlier in the year. The stock is yielding roughly 4.3%, which is near the highest levels investors have seen here in roughly 20 years, which suggests that income investors could be looking at a bargain price today. Add in the energy company's incredible 36-year streak of annual dividend hikes (tops among its peers) despite operating in a highly volatile sector and now seems like a great time for a deep dive.

The oil giant isn't a risk-free investment, but it looks like it is dealing well with the biggest headwind it faces today. For a few years, its oil production was falling, which is bad for an oil company. In the second half of 2018, however, it appears to have stemmed the declines. Put simply, its massive investment plans are starting to bear fruit and the future here is starting to look much better.

But one other thing that really sets Exxon apart is its rock-solid finances. A quick look at the company's balance sheet tells an important story: Long-term debt makes up less than 10% of the capital structure, an incredibly low figure for any company. This conservative financial positioning should allow Exxon to support its growing dividend and capital investment plans even if oil prices fall into a bear market. Investors of all types would do well to take a good look at Exxon today.

2. Services take a hit

Giants like Exxon hire companies like Helmerich & Payne, which builds and leases out drill rigs, to help them pull oil and natural gas out of the ground. When energy prices are low, demand for drilling services generally falls, often dropping off dramatically as customers pull back on capital spending plans to save money. The sector has been pretty weak since the severe oil price decline in mid-2014. This helps explain why Helmerich & Payne's stock is down nearly 60% from the highs it reached that year. The yield, meanwhile, is a heady 4.8%, backed by 46 years' worth of annual increases. Like Exxon, Helmerich's yield is toward the high end of its historical range.

The problem here is that Helmerich only does well when its customers are drilling. And while the company's contracted rig count is up materially from the lows reached after the deep 2014 oil crash, it still only has around 62% of its fleet working today. However, the company is the market share leader in the U.S. land market, which is one of the world's hottest drilling areas today, and it has long focused on owning the most technologically advanced rigs. So, it is well positioned in the industry. It should be able to muddle through during tough times and provide superior performance in good times. Right now, it's somewhere in between those two extremes, but it generally looks like things are heading in a positive direction.

That said, one of the most enticing features of the company is its conservative balance sheet. Long-term debt makes up roughly 10% of the capital structure. That's much less leverage than its closest peers and gives Helmerich & Payne plenty of financial leeway to deal with tough times while still rewarding investors with hefty dividend payments. If you can stomach a little risk, Helmerich is worth a close look.

3. Moving energy from point A to point B

Last up here is Magellan Midstream, with its roughly 6.5% yield. That's toward the high end of the partnership's history, but notably around twice what it was roughly five years ago. That increase in the yield, however, wasn't all about unit price declines in a sector that's been out of favor. In fact, Magellan's units "only" fell around 25% over that span (the broader MLP sector was down roughly twice as much). Also helping to push the yield higher was the distribution increasing an impressive 60%.

There's something of a disconnect going on here. Magellan's business is largely backed by fee-based assets so there is ample and reliable cash flow to cover and grow its distribution. In fact, distribution coverage is targeted at a strong 1.2 times. Meanwhile, its leverage is toward the low end of the industry, with debt to EBITDA of just 2.4 times. Magellan and its distribution appear solid.

Magellan also has plenty of growth potential. Its primary business is helping domestic energy companies get products from where they are drilled to where they get used. Not only is U.S. onshore drilling a hot global market, the United States is also short on the needed infrastructure to move all the oil and natural gas it's generating. That helps underpin Magellan's plans to spend roughly $1.25 billion on growth projects in 2019 and 2020, with another $500 million or so waiting in the wings. That, in turn, should allow this high yielder to keep increasing its distribution over time. Conservative investors looking for a big yield should like what they see here.

Down but hardly out

Exxon, Helmerich & Payne, and Magellan are all high-yield energy stocks that look pretty cheap today. But finding inexpensive energy stocks isn't all that hard to do right now. What is hard is finding energy stocks worth owning. This is where this trio really stand out. They not only offer high yields, but the conservative financial positioning to keep paying you to own them even when times get rough. Exxon and Magellan are good options for just about any investor, while Helmerich would be best for more aggressive types. All in, it's likely that at least one of these energy stocks, with yields at the high end of their historical ranges, will be of interest to you.

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Reuben Gregg Brewer owns shares of ExxonMobil. The Motley Fool recommends Magellan Midstream Partners. The Motley Fool has a disclosure policy.