Analyst names energy stocks that investors should look out for

Despite the weak performance of energy stocks this year, investors can still find undervalued opportunities in the sector, says Hennessy Midstream Fund and Hennessy Energy Transition Fund manager Ben Cook. He has picked out a few companies worth looking out for. Among their advantages are strong cash flow and growing demand for natural gas,  writes Barron's. 

Cook notes that the largest U.S. energy company, Exxon Mobil, is well diversified and can succeed in virtually any energy environment.  "With expected free cash flow of up to $110 billion, even at prices as low as $55 a barrel, we fully expect Exxon to buy back its own shares by about $20 billion a year for the next five years. That means they (potentially) could (potentially) buy back about 20% of their market capitalization," he says.

He also likes pipeline operators Kinder Morgan and Williams Cos. Both companies benefit from demand from AI developers and have transportation networks that are difficult for competitors to copy, Cook said.

He also mentioned natural gas producer Expand Energy, created by the merger of Chesapeake Energy and Southwestern Energy. Cook said the company could be helped by robust demand for natural gas, given its assets in well-located geographic areas that provide energy for AI.

All of these companies are endorsed on Wall Street, with 50% (Williams Cos.) to 90% (Expand Energy) of analysts tracking them advising to buy their shares, according to MarketWatch data. 

The Energy Select Sector SPDR exchange-traded fund, which tracks U.S. energy companies, is up just 1.5% this year, the third worst-performing sector in terms of returns since the start of the year, Barron's notes. By comparison, the S&P 500 broad market index is up about 6%.

"Energy in general is just too cheap," Cook says. He notes that the Energy Select Sector SPDR fund trades at an EV/EBITDA multiple (the ratio of a company's value to the earnings before expenses it generates) just over seven - that's half the same multiple of the S&P 500. 

That said, energy generates about twice as much free cash flow as the broad index, says Cook. The sector as a whole has become much more disciplined in terms of having sufficient cash on hand - and the manager believes it is now more determined to return cash to shareholders than at any other point in history.

Cook also believes that the oil price will continue to stagnate this year, given increased production by OPEC countries. He also highlights the fact that the sector is now seeing the first decline in global E&P spending since 2020, but the situation could improve in 2026.

Demand for natural gas, on the other hand, remains strong, Barron's notes. Not only is energy-intensive AI driving up its price, but it could also benefit from ongoing trade negotiations, according to Cook. Countries such as Japan or South Korea, which already import U.S. liquefied natural gas, may well agree to take more as part of duty negotiations, he says.

This article was AI-translated and verified by a human editor