This past year has been a bit of a head-scratcher for energy investors. While oil prices lost their footing earlier this summer and fell into the low $40s, crude quickly recovered into the upper $50s and is on pace to end the year about 7% above where it started. That higher price should have taken energy stocks up with it this year, but that hasn't been the case since most lost value. Because of that, many currently trade at compelling valuations.
In fact, several big-name energy companies sell well below where analysts think they should trade. Three stocks that stood out as having the most upside are on the following chart:
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Here's a look at why analysts believe this trio could rebound in 2018.
Missing the forest for the trees
Halliburton's stock has gotten pummeled this year, falling more than 14% through mid-December, even as the oil-field service giant finally returned to profitability in the second quarter and blew past analysts' expectations in the third. However, instead of latching on to those positives, investors focused on the dip in oil prices because it would have an impact on Halliburton's business in the near-term. That's after the company warned last quarter that growth in its oil well drilling and evaluation business would slow, which could cause fourth-quarter results to backtrack.
That said, despite this near-term weakness, many analysts remain bullish on Halliburton's longer-term prospects. Deutsche Bank, for example, named Halliburton as one of its three best long-term investment ideas in the oil services sector, giving the stock a buy rating with a $54 price target. Analysts at the bank like Halliburton's high exposure to the North American drilling market, which puts it in the best position to participate in the eventual oil market recovery. That recovery doesn't seem to be too far away now that crude has rebounded, which should result in a stronger drilling market next year and provide Halliburton with more work to drive its financial results higher.
Waiting for the fog to clear
Natural gas pipeline behemoth Kinder Morgan has also slumped this year, falling more than 13% through mid-December. That slide came even though the company completed its turnaround plan, which put it in position to return more cash to investors next year. Kinder Morgan already said it would increase its dividend 60% and that it could repurchase $500 million in shares in 2018.
The announcement of higher cash returns should have provided a spark for Kinder Morgan's stock. However, it seems like investors have chosen to focus their attention on the delay in starting construction of the company's Trans Mountain Pipeline expansion project in Canada, which is the largest in its backlog. The company had hoped to begin building it this year but continues facing intense opposition, which has held back permitting. As a result, the project might encounter a nine-month delay and could still get canceled, although the company recently received a favorable ruling from Canada's energy regulator, which "provides a measure of visibility" into the company's ability to overcome the opposition, according to an analyst at Royal Bank of Canada. If Kinder Morgan starts construction on the project in 2018, it will remove the fogginess that's currently clouding the company's growth prospects, which should lift the weight that has been holding down the stock.
A safe bet on the oil recovery
Oil-service giant Schlumberger has taken it on the chin this year, plunging nearly 24% through mid-December even though its earnings finally broke out of their funk last quarter. That's because, like Halliburton, Schlumberger warned that the dip in oil prices over the summer caused producers to cut spending, which would likely weigh on fourth-quarter results, with the company suggesting that the analyst consensus estimate for earnings might be a bit too high.
That dimmer view did cause analysts at Goldman Sachs to tweak their opinion of Schlumberger's stock last month by removing it from their "Conviction Buy List." That said, the bank still rates shares a buy and believes them to be worth $75 apiece, which isn't that far off from their prior view that shares should fetch $78. Driving that still bullish view is Schlumberger's upside as the oil market continues recovering. Meanwhile, SunTrust raised its price target on the stock at the end of October from $63 to $72, citing the belief that oil would be at the upper end of its $50- to $60-per-barrel price range in 2018 and 2019. That improved pricing should stimulate revenue and earnings growth in the coming year, which makes Schlumberger's stock a "safe choice" for investors in the bank's opinion.
The odds of a 2018 rebound appear promising
While oil prices and industry activities rebounded this year, most energy stocks didn't get the memo. However, that could change in 2018, since it seems like the oil market will be even stronger thanks to OPEC's decision to maintain a lid on its production while most shale drillers plan to exercise restraint and avoid flooding the market with too much oil. If that forecast comes to fruition, then analysts could be right that these energy stocks should trade higher in 2018.
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Matthew DiLallo owns shares of Kinder Morgan and has the following options: long January 2018 $30 calls on Kinder Morgan and short March 2018 $17 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.