Energy is an essential sector. We all need energy to drive our cars, power our homes and businesses, and to operate the devices that make life easier and more enjoyable. Nevertheless, some of the companies that supply the world’s energy are extremely undervalued and under-appreciated by investors. This means that there are opportunities for investors looking for value. There are also opportunities out there for investors looking for dividends, as energy companies are among the most shareholder-friendly. Many pipeline companies, integrated oil companies, and utility companies pay very nice dividends compared to the historically 1.9 percent offered by the S&P 500.
With this being the case, I think investors should consider taking positions in the companies I discuss here. They provide an essential product to society, they are profitable, and they are inexpensive. This makes for a solid and simple investment thesis.
1. Conoco Phillips (NYSE:COP)
ConocoPhillips is America’s third-largest integrated oil company, behind Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM). While Exxon Mobil returns more capital to shareholders thanks to its sizable share repurchase program, investors looking for income today should look to ConocoPhillips. This company pays a 3.7 percent dividend, about double that of the S&P 500. It also trades at about 11 times earnings. Despite these attractive metrics, it has outperformed its integrated oil peers ever since it spun off its refining business in order to focus solely on exploration and production.
The company’s earnings are expected to grow as the company grows production. It has massive exploration programs in the Texas Eagleford Shale region and off the coast of West Africa, which gives it long-term growth potential.
Given these points, the stock isn’t going to make you rich, but it is going to rise steadily in value over the long term. It is also going to pay you a nice dividend that is going to keep growing over the years.
Investors interested in purchasing ConocoPhillips shares should wait for a pullback, as the stock has been performing extremely well in the past few weeks. The stock currently trades at about $74 per share, but investors should take a position at $70 per share to $72 per share.
2. BP (NYSE:BP)
BP is a controversial stock, and for this reason it offers a lot of value. The controversy goes back to the Gulf of Mexico oil spill in 2010. Since then, the company has faced public outrage and innumerable lawsuits, and the fallout is far from over.
Nevertheless, BP is still a solid investment that is generating profits, paying dividends, and growing production. Since the market isn’t recognizing this, there is an excellent opportunity for those investors who are willing to take a little more risk. The stock pays a 4.5 percent dividend. While this dividend is down from the time of the Gulf oil spill, it has been rising steadily as the company recovers.
Furthermore, the stock trades at just 9 to 10 times earnings, which is extremely inexpensive considering that the S&P 500 trades at 22 times earnings. While I don’t expect BP to trade in line with the S&P 500 on a price-to-earnings basis, even if it trades at a 25 percent discount, it has 70 percent upside, and it would still be paying a dividend that is much higher than that of the S&P 500!
Of course, there is some risk. As I mentioned, there is a lot of public outrage given the oil spill, and there are still a lot of lawsuits outstanding. This is probably going to hit BP’s earnings for several years — but this will dissipate. As for the risk that something like this can happen again, keep in mind that all oil companies face this risk, and the best solution from an investment standpoint is to diversify.
Like ConocoPhillips, BP shares have been rising lately. Therefore, investors might want to wait for a pullback. Right now, the shares trade at about $49, and there is support around $47.50. More conservative investors might want to wait for a pullback to $45-$46 per share, although we may not see this level.
Disclosure: Ben Kramer-Miller has no positions in the stocks mentioned in this article.