We recently compiled a list of the 8 Best Undervalued Energy Stocks To Buy According to Analysts. In this article, we are going to take a look at where ConocoPhillips (NYSE:COP) stands against the other undervalued energy stocks.
Following another eventful year for the global energy sector, 2024 continues the trend of disruptions, headwinds, and opportunities. The previous year concluded with a landmark agreement at COP28 to reduce global methane emissions, a significant contributor to worldwide emissions. Despite being one of the world’s more mature industries, the international energy sector remains incredibly dynamic, with journalists, governments, investors, and analysts paying special interest to developments within the industry to assess their potential impact on the global business and economic landscapes.
Energy stocks experienced negative returns in 2023, but have risen in early 2024 alongside the price of oil. Generally, energy stock prices tend to track changes in energy prices. For instance, when energy prices peaked in 2022 due to Russia’s invasion of Ukraine and the lingering effects of the COVID-19 pandemic, many companies in the energy sector saw gains. Global production levels are also crucial to the sector’s performance. While U.S. oil production has been relatively high in recent months, many OPEC+ countries have capped production. Although demand for energy products continues to grow, there is uncertainty about whether supply will increase accordingly.
On another front, global investment in the energy transition has increased tremendously over the years, hitting the $1.8 trillion mark in 2023, flagging a 17% rise from the previous year, according to BloombergNEF. However, this amount is a fraction of the $1.77 trillion invested globally, with the business case for adopting renewable energy becoming more compelling for companies. Conversely, the oil and gas sector has seen a significant surge in merger and acquisition activity, with over $155 billion in deals in the fourth quarter of 2023. This total surpasses the combined value of deals from the previous five quarters. Facing challenging market and economic conditions, oil and gas companies—especially those in upstream, midstream, and oil field services—are expected to continue this consolidation trend into 2024.
Oil prices bottomed on June 5 due to an unexpected increase in U.S. crude stocks and a larger-than-anticipated rise in fuel inventories, heightening demand concerns amid potential supply growth later this year. At the time data from the U.S. Energy Information Administration showed that the U.S. crude stockpile rose by 1.2 million barrels in the week ending May 31, contrary to analysts’ expectations of a 2.3 million barrel draw. However, this build was less than the American Petroleum Institute’s report, which indicated an increase of over 4 million barrels. On the other hand, gasoline inventories increased by 2.1 million barrels, exceeding expectations of a 2 million barrel rise. This contributed to demand concerns, as the week reflected fuel usage around the Memorial Day holiday, traditionally seen as the start of the U.S. summer driving season. Oil prices increased by about $5 since then, currently trading above $78 per barrel.
The energy industry is not only massive but also holds significant growth potential. According to the United Nations, achieving the goals of the Paris Climate Agreement will require an annual investment of $2.4 trillion in energy systems over the next 11 years. Illustrating this growth, a report states that the global renewable energy market, valued at $899.24 billion in 2022, is expected to grow from $1,050.31 billion in 2023 to $3,637.99 billion by 2031, at a CAGR of 16.80% during the forecast period.
The current year promises to be another rollercoaster ride for the energy industry, raising critical questions about the feasibility of achieving the net-zero targets outlined in the Paris Agreement. Commenting on this, Rystad Energy CEO Jarand Rystad remarked:
“Last year was a pivotal one for the energy world. Renewable energy capacity expanded rapidly, keeping up with global power demand growth for the first time. Solar PV needed to grow by 220 gigawatts (GW) in 2023 to track the 1.6 DG scenario for global warming. The latest figures now indicate that it could end up at above 400 GW. And there is now supply chain visibility for an annual delivery of 1,500 GW. Global coal demand most likely peaked in 2023, and clean energy technologies are now more affordable than fossil fuel alternatives in most parts of the world. Fossil fuels will, however, remain an important component of the energy mix for the next decades. Countries like Denmark, Finland and Portugal are close to achieving zero carbon power sectors, successfully dealing with the intermittency challenge of renewables. Still, there are also setbacks in renewable deployment, like the cost inflation seen in offshore wind, and governments will need to step up stimulation to get these sectors back on track. This year could see more inflection points in the energy transition, with impacts felt well into the latter half of the decade.”
With this context in mind, we are now talk about Wall Street analysts’ best undervalued energy stocks to buy.
Our Methodology
To compile our list of the best undervalued energy stocks to buy according to analysts, we used a stock screener to identify energy stocks with price-to-earnings (P/E) ratios below 25. We then ranked these firms based on their average analyst share price target upside. For each of these energy stocks, we have also included hedge fund sentiment. Why do we track stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An underground network of pipelines transporting oil through an expansive terrain.
ConocoPhillips (NYSE:COP)
Average Analyst Estimates as of May 28: $146.71
Average Analyst Upside as of May 28: 26.35%
P/E Ratio: 13.04
Founded in 1917, ConocoPhillips (NYSE:COP) is a Texas-based global energy company involved in the exploration, production, transportation, and marketing of various energy resources, including crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids.
ConocoPhillips (NYSE:COP) has agreed to acquire Marathon Oil in an all-stock deal valued at $17.1 billion, aiming to catch up with rivals as drillers race to secure new oil and gas wells. Under the terms of the agreement, Marathon Oil shareholders will receive 0.255 shares of ConocoPhillips (NYSE:COP) for each share of Marathon Oil, representing a nearly 15% premium based on Marathon Oil’s closing share price. This deal enables ConocoPhillips (NYSE:COP) to expand its presence in key U.S. shale basins, including those in Texas and North Dakota.
Truist Securities raised its price target for ConocoPhillips (NYSE) shares to $165 from $160, while maintaining a Buy rating for the stock, an adjustment that comes in light of the aforementioned acquisition of Marathon Oil. Post-acquisition, ConocoPhillips (NYSE:COP) is projected to perform strongly, potentially generating over $18 billion in free cash flow next year. This would result in a free cash flow yield exceeding 12%, anticipated to be the highest among major oil companies. Overall, COP ranks 3rd among the 9 Best Energy Dividend Stocks to Buy According to Hedge Funds.
As of the end of the first quarter, 62 out of 919 hedge funds tracked by Insider Monkey held stakes in ConocoPhillips (NYSE:COP). The largest stakeholder during this period was Boykin Curry’s Eagle Capital Management, with a $1.8 billion investment. The stock ranks among the top 3 on our list of the best undervalued energy stocks to buy according to analysts.
Overall COP ranks 3rd on our list of the best undervalued energy stocks to buy. You can visit 8 Best Undervalued Energy Stocks To Buy According to Analysts to see the other energy stocks that are on hedge funds’ radar. While we acknowledge the potential of COP as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than COP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.