Investing in energy, especially the oil and gas business, looks like a great sector for those seeking value stocks. Even though the price of Brent crude oil -- the international benchmark price -- has risen 40% this past year and is above $75 per barrel, the Energy Select SPDR ETF -- a rough estimation of energy stocks in general -- is up less than 17% over that time frame. This could mean that Wall Street is undervaluing oil and gas stocks and that it might be a good opportunity to buy now.
So we asked three Motley Fool contributors to each highlight a stock worth buying now in the energy sector. Here's why they picked rig company Helmerich & Payne (NYSE: HP), pipeline company Enbridge (NYSE: ENB), and liquefied natural gas company Tellurian (NASDAQ: TELL).
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Improving demand, great dividend yield
Reuben Gregg Brewer (Helmerich & Payne, Inc.): The oil downturn that started in mid-2014 brutalized demand for Helmerich & Payne's drill rigs. Its active rig count in the onshore U.S. market, its most important segment, plummeted from 297 in the first quarter of fiscal 2015 to 87 in just a year and half. Needless to say, revenue and earnings took a hit.
Making matters worse, Helmerich & Payne has a long-standing tradition of ensuring that its fleet of rigs is at the leading edge of the industry. That means spending money on upgrades, which it did even while demand was weak. That capital spending pushes up costs, most notably depreciation. That said, it has already upgraded more than half of its U.S. onshore fleet to the latest tech, which is more flexible and efficient -- and in high demand. All that spending, meanwhile, was done without destroying the balance sheet. Long-term debt makes up just 10% or so Helmerich & Payne's capital structure.
And now that demand for drilling rigs is increasing again, and the company's rig fleet is far along in the upgrade process, Helmerich & Payne is picking up 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. Although demand will ultimately determine the company's success, this downturn buttressed Helmerich & Payne's already impressive track record of navigating a highly cyclical industry. Better yet, dividend investors can still collect a hefty 4.2% yield from a company that's increased its dividend annually for 46 consecutive years despite the inherent volatility in the markets it serves.
Still undervalued despite the progress
Matt DiLallo (Enbridge): Shares of Canadian energy infrastructure giant Enbridge have lost 15% of their value over the past year. That sell-off comes even though the company has made better-than-expected progress 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 anticipated that it could grow earnings 15% this year and at a 10% compound annual rate through 2020, fueled by the roughly 20 billion Canadian dollars ($15.3 billion) of expansion projects it had under construction. On top of that, the company planned to sell about CA$3 billion ($2.3 billion) in noncore assets by year's end, which would push its leverage ratio to a more comfortable 5.0 times debt to EBITDA. That outlook positioned the pipeline giant to grow its high-yield dividend at a 10% annual pace through 2020.
Enbridge has already vastly exceeded most of the tenants of that plan. For starters, it has announced CA$7.5 billion ($5.8 billion) in asset sales, which put it on pace to exceed its leverage target. Furthermore, the company is in the process of simplifying its corporate structure by acquiring all its publicly traded affiliates, which while neutral to its 2020 growth plan, will boost earnings starting in 2021. Finally, the company won approval to finish its largest expansion project.
Despite 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.
Major catalysts coming soon
Tyler Crowe (Tellurian Inc.): Tellurian is a stock I can't stop thinking about because of the incredible potential it has over the next few years. Even though the company's business plan has yet to make it off a piece of paper, the fundamentals are there for Tellurian to develop a liquefied natural gas (LNG) export terminal over the next several years. One thing that makes this stock so exciting right now is the fact that so much of the company's fate will be decided over the next few months.
Tellurian is looking to use a new way to get an LNG 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.
Tellurian's approach is to offer customers an equity stake in the export terminal instead. For a fixed per ton buy-in, customers can buy a portion of the facility and get its portion of LNG from the facility at cost. This will drastically reduce the amount of debt Tellurian will need to fund its portion of the project.
Management said that it has been actively marketing to customers since the first quarter of the year and that more than 25 people were bidding on the project. It expects to announce the final partners in the project by the end of the year at the latest. Also, Tellurian expects to receive a decision from the Federal Energy Regulatory Committee (FERC) in January regarding its permit to sell LNG to non-free trade agreement countries.
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.
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Matthew DiLallo owns shares of Enbridge. Reuben Gregg Brewer has no position in any of the stocks mentioned. Tyler Crowe owns shares of Tellurian Inc. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.