The Best Energy Stocks to Buy

Energy stocks appeal to investors for a few different reasons.

1. Energy stocks tend to perform independently of other types of stocks. As a result, investors buy energy stocks to diversify their portfolios.
2. Many energy stocks offer attractive yields and therefore appeal to investors who like high-dividend stocks.
3. Energy stocks provide investors with a way to play rising oil prices.
4. Energy stocks can help hedge against inflation as oil and gas prices typically rise during inflationary periods.

During the trailing one-year period, the Morningstar US Energy Index returned 23.29%, while the Morningstar US Market Index returned 28.83%.

The energy stocks that Morningstar covers look 4% undervalued today.

To come up with our list of the best energy stocks to buy now, we screened for:

• Energy stocks that earn narrow or wide Morningstar Economic Moat Ratings. We think companies with narrow moat ratings can fight off competitors for at least 10 years; wide-moat companies should remain competitive for 20 years or more.
• Energy stocks that are undervalued relative to the average stock in the sector, as measured by our price/fair value metric.

5 Best Energy Stocks to Buy

The stocks of these energy companies with economic moats were the most undervalued according to our metrics as of May 20, 2024.

1. SLB SLB
2. HF Sinclair DINO
3. Exxon Mobil XOM
4. Hess HES
5. Devon Energy DVN

Here’s a little more about each of the best energy stocks to buy, including commentary from the Morningstar analysts who cover them. All data is as of May 20, 2024.

SLB

• Morningstar Price/Fair Value: 0.78
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 2.28%
• Industry: Oil and Gas Equipment and Services

SLB is the cheapest stock on our list of the best energy stocks to buy. This oil and gas equipment and services company has a narrow economic moat rating. SLB is trading 22% below our fair value estimate of $60 per share and offers a 2.28% dividend yield.

SLB, formerly known as Schlumberger, is the largest oilfield services provider in the world, with a product portfolio that addresses nearly every end market in the industry. The firm has developed an impressive reputation as one of the leading innovators in oilfield services. Roughly 20% of its annual revenue comes from new technology, and the efficiency gains that well operators realize through SLB’s services have earned the firm a dominant market share in several categories, including wireline services, production testing, and logging-while-drilling.

Moving forward, SLB is targeting integrated services and digital solutions. Its asset performance solutions, or APS, business allows well operators to completely outsource project management to SLB. APS increases operational efficiencies for all parties by reducing the informational friction and time delays that tend to occur when contracting project stages to different service firms. The result is reduced project costs and quicker time to production. SLB’s Delfi ecosystem also represents significant opportunities for margin expansion by providing an asset-light, highly scalable software platform that improves project efficiency while augmenting SLB’s already impressive knowledge base.

The firm also aims to localize its expertise through its “fit-for-basin” approach. SLB intends to deepen relationships with its customers by creating solutions tailored to regional or individual customer requirements. The firm aims to develop technology with high in-country value that solidifies SLB’s international market access in the long run. We expect the recent Champion deal, and its strong production chemicals position to help with all these goals.

HF Sinclair

• Morningstar Price/Fair Value: 0.85
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 3.49%
• Industry: Oil and Gas Refining and Marketing

HF Sinclair is 15% undervalued relative to our $67 fair value estimate. This top energy stock from the oil and gas refining and marketing industry yields 3.49% and earns a narrow moat rating.

After the acquisition of Sinclair Oil, HollyFrontier, now HF Sinclair, is a fully integrated independent company composed of refining, marketing, renewables, specialty lubricants, and midstream businesses.

Its refining footprint has grown to seven refineries totaling 678,000 barrels per day in total capacity, including the recently acquired Puget Sound refinery. The latter deal extends the company’s footprint to the West Coast, beyond its historical midcontinent and Rockies roots and into a more difficult refining market with fewer competitive advantages. However, its foothold on the West Coast should help with the growing renewable diesel business given the region’s growing biofuel mandates.

The Sinclair acquisition extends HF’s push into renewable diesel, adding a production facility and pretreatment project. Combined with HF’s existing projects (two renewable diesel units and a pretreatment unit), it now can produce 380 million gallons annually and expects future growth.

Adding Sinclair’s marketing group of over 300 distributors, 1,500 wholesale brand sites, and 2 billion gallons a year of branded sales adds a stable earnings stream that HF previously lacked as a merchant refiner. In addition, it offers the ability to generate renewable identification numbers, whose high costs have put HF at a disadvantage in the recent past.

HF Sinclair had already begun to diversify its earnings when it acquired the Petro-Canada lubricants business, Red Giant Oil, and Sonneborn to diversify its earnings stream. It expects the segment to generate $250 million EBITDA annually while also serving as a platform for future growth.

At the same time, HF added Sinclair’s midstream assets including 1,200 miles of pipelines, eight product terminals with 4.5 million barrels of storage, and interests in three pipeline joint ventures. The incremental EBITDA of $70 million to $80 million will increase total midstream segment annual EBITDA to about $450 million while opening up future organic and external transaction growth opportunities.

Exxon Mobil

• Morningstar Price/Fair Value: 0.86
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 3.20%
• Industry: Oil and Gas Integrated

This narrow-moat oil and gas integrated company offers a 3.20% dividend yield. Exxon Mobil trades 14% below our fair value estimate of $138 per share.

While many of its peers are diverting investment to renewables to achieve long-term carbon-intensity reduction targets, Exxon Mobil remains committed to oil and gas. It has responded to calls to bring in more outside voices to its board and announced emissions-reduction targets. It’s also investing in low-carbon technologies, but these efforts are measured and keep oil and gas production at the core. While this strategy is unlikely to win praise from environmentally oriented investors, we think it’s more likely to be successful and probably holds less risk.

The end of oil is likely to occur, but not anytime soon. Gas is likely to have an even longer life because of the relative attractiveness of its emissions intensity and the need to supplement intermittent renewable power. These trends and growing demand for chemicals are what drive Exxon’s investment strategy and will likely deliver superior returns.

To satisfy investors, Exxon capped spending with guidance of $20 billion to $25 billion a year for 2023-27, which should keep the dividend safe at $40 per barrel. However, earnings should still grow with plans to double earnings and cash flow from 2019 levels by 2027. Meanwhile, the dividend break-even should fall to $30/bbl, thanks to structural cost efficiencies and high-margin new projects. This guidance excludes Pioneer Natural Resources.

Production will grow modestly through 2027, but portfolio profitability is set to improve because high-margin Guyana volumes are backfilling declines in North American dry gas production and lower-value divestments. Exxon’s high-quality Permian position, further bolstered with the addition of Pioneer Natural Resources, affords it capital flexibility and generates free cash flow, and should reach 2.0 million barrels of oil equivalent per day by 2027.

Exxon’s downstream and chemical segments have suffered from decade-low industry margins in the past, but market conditions are reverting to or surpassing midcycle levels, boosting near-term earnings. Investments are focused on producing higher-value lubricants and diesel in its downstream segment and performance products in its chemical segment, which should lift midcycle returns and earnings capacity.

Hess

• Morningstar Price/Fair Value: 0.87
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 1.12%
• Industry: Oil and Gas Exploration and Production

Narrow-moat Hess operates in the oil and gas exploration and production industry. This cheap energy stock yields 1.12%. Hess stock is 13% undervalued; we think the stock is worth $180 per share.

Hess’ track record for efficiently allocating capital and generating value has been steadily improving. The company has deftly streamlined its portfolio by jettisoning less competitive and riskier positions in Equatorial Guinea, the Danish North Sea, and Libya, and by shifting the focus to more lucrative oil and gas assets. Today, the firm has two major growth assets: its 30% working interest in the Exxon-operated Stabroek Block in offshore Guyana, and its acreage in the Bakken Shale play, which is US onshore. Cash flows from its legacy operations in the US Gulf of Mexico and Southeast Asia support Hess’ ongoing investment in these regions.

The firm’s Guyana assets will be an engine for rapid growth in the next few years, differentiating Hess from other independent upstream firms. This asset is a large reason why it is being acquired by Chevron CVX. Despite an operating agreement dispute over the deal heading to arbitration, we still expect the merger to close, though it will be delayed.

Slow and steady expansion has become the industry norm, with excess cash being funneled back to shareholders instead of plowed back into the ground. Hess still aims to distribute 75% of its free cash, but heavy upfront spending in Guyana is reducing that cash flow, although it still makes sense given the region’s exceptional economics and the size of the prize in the ground. The block’s gross recoverable resources are a moving target while exploration continues, but the latest estimate is over 11 billion barrels of oil equivalent. For Hess, that translates to an array of large projects. Recent guidance indicates six phases of development all online by 2027, culminating in gross volumes over 1.2 million barrels of oil per day. This includes two phases that have already been sanctioned and two that are currently producing. Even that feels conservative with over 30 discoveries to date. We model 10 phases.

Hess is also one of the largest producers in the Bakken Shale. This includes a large portion in the highly productive area near the Mountrail-McKenzie county line in North Dakota.

Devon Energy

• Morningstar Price/Fair Value: 0.89
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 4.10%
• Industry: Oil and Gas Exploration and Production

Devon Energy rounds out our list of the best energy stocks to buy. This stock looks 11% undervalued compared with our $56 fair value estimate. This oil and gas exploration and production company earns a narrow moat rating. The stock yields 4.10%.

In 2018, Devon embarked on a series of shrewd capital-allocation moves that saw it sell its EnLink Midstream interest, divest its Canadian heavy oil and Barnett Shale interests, and merge with WPX. These astute steps allowed Devon to recycle cash by shedding interests that were either noncore or higher on the cost curve. Recycled cash allowed Devon to meaningfully pivot toward the Delaware Basin and enjoy newfound exposure in the Bakken Shale. Previously, the Canadian heavy oil and Barnett Shale interests made up 40% to 50% of its production.

Today, Devon is among the lowest-cost providers on the US shale cost curve, along with Diamondback Energy FANG and EOG Resources EOG. Devon’s reconstituted portfolio is buoyed by its presence in the Delaware Basin, which supplies some of the lowest breakeven costs among US basins. About two thirds of Devon’s production is tied to this premier asset, which helps Devon command favorable well production relative to peers. We expect management to continue allocating capital to this basin. It has already signaled that over 60% of its roughly $3.6 billion in capital expenditure will be allocated to it in 2024.

That said, Devon is more than just a single-basin play. In fact, Devon boasts a meaningful presence in four of the top five US shale basins by lowest breakeven costs. These include the Williston, Eagle Ford, and Anadarko basins. Exposure to high-quality assets with a nearly 17-year remaining inventory life, coupled with operational improvements from initiatives like longer laterals, should allow Devon to enjoy modest production growth. Importantly, we expect production gains will come at increasingly attractive drilling and completion costs.

Finally, we think Devon completed its reset with its revised capital-allocation framework in late 2020. That framework was the first to implement a fixed plus variable dividend; its shareholder orientation was warmly received by the market. In 2024, Devon’s capital-allocation framework calls for returning 70% of its free cash to shareholders. While capital returns still favor the dividend, the bias has somewhat shifted toward buybacks. We’re less enthused by this given Devon’s 2024 valuation relative to market pricing.

How to Find More of the Best Energy Stocks to Buy

• Review Morningstar’s comprehensivelist of energy stocks to investigate further.
• Use the Morningstar Investor screener to build a shortlist of energy stocks to research and watch.
• Read the latest news about notable energy stocks from Morningstar’s Stephen Ellis and Katherine Olexa.