As treasury yields approach 17-year highs, valuations are starting to matter more. Investors are ditching expensive technology stocks and rotating into value. One area of safety is overlooked energy stocks trading at single-digit forward price-to-earnings (P/E).
After a sluggish first half due to the decline in crude prices, energy stocks are recovering nicely. The rally in oil prices catalyzed the recovery.
Notably, crude oil prices have broken above $87, a strong resistance zone over the past year. And with OPEC sticking to its production cuts, supply is getting squeezed. These actions have set the stage for sustainably higher oil prices.
Even analysts have turned bullish, with Goldman Sachs (NYSE:GS) increasing its Brent crude price target to $100. They expect supply to remain constrained as Saudi Arabia maintains its voluntary cuts up to the second quarter of next year. Meanwhile, they expect OPEC to keep its 1.7 million barrels per day cut through 2024. Given the constrained supply dynamics, these overlooked energy stocks will do well.
Permian Resources (PR)
After the recent plan to acquire Earthstone Energy (NYSE:ESTE), this energy stock is a buy. The firm has aggressively acquired acreage in the Permian basin, but this deal is a game changer.
First, Permian Resources (NYSE:PR) will add 223,000 net acres from the deal. Besides enhancing its position with some of the best geological assets, the deal is immediately accretive. It will boost all key financial metrics. For instance, even before any cost synergies kick in, it will be accretive to free cash flow per share.
Furthermore, after the deal closes, there will be $175 million in annual total cost synergies. The firm will save about $115 million from drilling, completions and facilities (DC&F), lease operating expenses (LOE) and gathering, processing and transportation (GP&T) expenses. The rest of the cost savings will be from administrative and capital costs.
Notably, the combined entity will enjoy significant benefits from economies of scale. It will be the sixth-largest producer in the Permian Basin. As a result, the new Permian Resources will enjoy lower operating costs and cost of capital.
In terms of valuation, the stock is cheap. Based on management forecasts, the firm trades at under 4x 2024 EBITDA. Considering the bargain forward multiple and rock-solid balance sheet, Permian Resources is one of the overlooked energy stocks to buy.
Vital Energy (VTLE)
Another acquirer in the Permian Basin has been Vital Energy (NYSE:VTLE). On September 13, it announced its acquisition of oil and gas properties in the Permian worth $1.165 billion.
Considering the significant acreage added, VTLE stock remains one of the most overlooked energy stocks. Through the acquisition, the company acquired 53,000 acres and 248 million barrels of oil equivalent (BOE) of proven reserves. After these additions, Vital Energy will produce 112,000 BOE per day in 2024.
The new production target represents over 25% production growth. Yet, the stock continues to trade at one of the lowest multiples. Management expects the proforma free cash flow in fiscal year 2024 will be about $375 million. That represents a 90% increase.
Based on the free cash flow estimate, VTLE stock trades under three times the expected FY2024 free cash flow. Indeed, it’s one of the most overlooked energy stocks, especially in a rising oil price environment. Also, the deal increases oil production to 50% of the total.
Overall, these asset additions are a good deal for the company. In addition to the free cash flow growth mentioned above, they bring in high-return locations. Notably, the 150 gross locations added have a breakeven price of $50 per barrel for West Texas Intermediate crude.
Finally, the oil and gas producer expects to quickly reduce its leverage to 1.0x by the end of 2024. Vital Energy’s management has a history of making disciplined acquisitions that drive production growth. This deal is another example. And the rising oil prices are a tailwind for this bargain energy stock.
Devon Energy (DVN)
One laggard that could be due for a catchup is Devon Energy (NYSE:DVN). Over the last three months, Brent crude is up over 20% and the S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) is up over 17%. Meanwhile, DVN stock is down 11% over the same period.
Much of the softness has come from a slight miss in second-quarter earnings. Also, the markets didn’t like that it lowered its dividend to $0.49 per share.
However, there are many reasons to like DVN stock here. First, as earlier mentioned, it has been a laggard and is due for a catchup. Secondly, although it missed earnings in the second quarter, the company maintained full-year production of 643,000 to 663,000 BOE per day.
With crude hitting 2023 highs, there will be a material improvement in revenues in the coming quarters. Furthermore, management expects a slight decline in capital spending for the third quarter. That means there might be more cash flow available to boost shareholder returns.
As of this writing, the stock trades at a forward P/E of 10 and a 7.5% free cash flow yield. Analysts think the stock is one of the overlooked energy stocks and predict over 20% upside.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.