5 Buy-Ranked Energy Bargains For Value Investors

After a strong rally in 2016 that saw prices jump more than 100% to around $54-a-barrel, oil has encountered a speed bump this year.

Oil Slides

For the first two months of 2017, oil prices found themselves locked in a sideways trading range, as the tug-of-war over two powerful, opposing supply narratives continue.

Reports indicated an impressive 90% compliance level from the OPEC producers who pledged output cuts in an effort to tackle the three-year supply glut. However, a burgeoning rig count – pointing to the ever-increasing shale drilling activities – kept prices in check, within a band between $50-$55 a barrel.

And then prices broke below the psychologically important $50 threshold.

At the crux of the matter is the rising flood of U.S. shale-driven production. Now at a financial equilibrium, the shale firms are putting more rigs and employees back to work. Throughout the downturn, producers worked tirelessly to cut costs down to a bare minimum and look for innovative ways to churn out more oil from rock. And they managed to do just that by improving drilling techniques.

With these efforts, many upstream companies have repositioned themselves to adapt to the new $50 oil reality and even thrive at those prices. In other words, while OPEC's moves to trim output and rebalance the demand-supply situation has stabilized the market to a large extent, in the process it has incentivized shale drillers to churn out more. As per EIA's latest inventory release, the U.S. produced to 9.32 million barrels a day, 6.3% higher than year-earlier levels.

The extension of supply curbs by top producers led by OPEC also disappointed markets. At a meeting in Vienna last month, the cartel (plus non-members led by Russia) decided to roll over their output cuts of 1.8 million barrels per day (bpd) to reduce global oil inventories until Mar 2018. The move, though widely expected, spooked some oil market investors who hoped that the cuts would be deepened/lengthened further.

Meanwhile, the producer cartel pumped more oil in May than in Apr – the first monthly rise in 2017 – on increasing output from Nigeria and Libya, which are exempt from the deal. The production boost offset improved compliance by other members.

Therefore, the commodity is not yet out of the woods and high inventories amid robust production could still push it to the depths of multiyear lows. As it is, the profit margins of several players from the industry have seen massive declines. This has hit stock prices as well.

Although the overall bearish sentiment on the oil and gas industry took all stocks down with it, some of these remain fundamentally strong.

Fundamentally Strong - and Cheap - Value Stocks

While there can be many reasons to sell a stock, there is usually a single reason to buy. Who wouldn’t want to pocket a few extra bucks? Low-priced stocks never go out of fashion and one doesn’t really need to be a genius to understand why.

For starters, one can buy a lot of shares of a company for a certain amount. While expenditures seem to increase exponentially, the same is usually not true for our income. From the little that we actually manage to set aside for investment, one would definitely prefer to buy 100 shares, say at around $20, rather than buying 10 shares at $200. Often these $20 firms hold tremendous potential but remain off investors’ radar.

However, most of these players are generally not industry giants and hence, a little extra effort must be put in to select the correct stocks. Since the long-term landscape holds well for energy stocks, despite certain bottlenecks, it will be a wise decision to invest in value stocks.

Value investing offers an opportunity to enter the market and grab stocks that have otherwise been overlooked by a majority of investors, and are thus trading at cheap multiples.

So what are the criteria to identify value stocks?

A value stock may have a high dividend yield, low price-to-book ratio, low price-to-earnings ratio or a low price-to-sales ratio. However, it might be difficult for one to look at each parameter and compare with the peer group for an analysis on whether the stock is attractive from the value perspective.

Thanks to our new style score system, we have been able to identify value stocks which have incredible potential in the near term. Our research shows that stocks with Value Style Scores of ‘A’ or ‘B’ when combined with Zacks Rank #1 (Strong Buy) or 2 (Buy) offer great investment opportunities. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Also, these stocks are currently trading below $20, which makes them lucrative picks.

Here Are the Stocks

Enbridge Energy Partners L.P. (NYSE:EEP) : Houston, TX-based Enbridge Energy Partners is an energy pipeline operator engaged in the gathering, processing and transmission of natural gas and crude oil.

Zacks Rank #1

Value Score: B

Current Price: $16.44

McDermott International Inc. (NYSE:MDR) : Incorporated in 1959, Houston, TX-based McDermott International is an engineering and construction company, solely focused on the offshore oil and gas business.

Zacks Rank #2

Value Score: A

Current Price: $6.76

W&T Offshore Inc. (NYSE:WTI) : An exploration and production company headquartered in Houston, TX, W&T Offshore focuses primarily in U.S. Gulf of Mexico’s shallow water shelf.

Zacks Rank #2

Value Score: A

Current Price: $2.20

Enerplus Corp. (TO:ERF) : Calgary, Canada-based Enerplus is an independent oil and gas production company with resources across Western Canada and the U.S.

Zacks Rank #2

Value Score: A

Current Price: $8.39

Repsol (MC:REP) S.A. - ADR (OTC:REPYY) : Repsol is Spain’s largest energy company, which is engaged in oil and gas exploration and production, refining and marketing of petroleum products, and other energy-related businesses.

Zacks Rank #2

Value Score: A

Current Price: $16.26

Bottom Line

Finding a bargain stock is all about strong fundamentals and making the most of an opportunity by taking the right decision at the right time. The best part of buying them: they come really cheap and hold tremendous potential.

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