Heightened geopolitical tensions have triggered volatility in crude oil prices, but one strategist is looking keenly for opportunities in the energy sector. It was among the laggards last year, but things have turned around with many stocks now trading near all-time highs. Stephen Ellis, energy and utilities strategist at Morningstar, said oil market volatility does present challenges and urged investors to be patient, which “regularly pays off within energy.” “We are typically more excited about energy stocks when oil prices collapse like they did in 2020 or the market has a more negative view as that’s when we can find the most compelling returns and bargains,” Ellis told CNBC Pro on Apr. 19. However, he did say there were “selective bargains” in the market currently. It comes as oil futures posted a loss last week amid fading fears of a wider conflict in the Middle East that would have likely disrupted crude supplies. Brent crude oil prices were trading around $86.50 on Apr. 22, down 4.4% over the past five days. ‘Quality’ names within energy Ellis said he searches for quality names when selecting stocks in the energy space. His top picks include Canadian pipeline transportation and energy player Enbridge , oilfield services company SLB , natural gas corporation TC Energy , and energy giants APA Corp and ExxonMobil . “All of these are ‘moaty’ firms that have some upside to our fair value estimates, even in a period of high oil prices,” Ellis explained. Stocks with wide “economic moats” are viewed as having durable competitive advantages. Enbridge He describes Enbridge as “rare opportunity to acquire a long-time investor favorite at a discount.” The company recently marked its 29th consecutive year of dividend increases, with a 3.1% rise in its quarterly dividends to 9.50 cents per share. This brings its annual dividend payout to $3.66 per share. Morningstar has a fair value estimate of 56 Canadian dollars ($41) on the stock, giving it around 16.7% potential upside. TC Energy, SLB Morningstar has a four-star rating on TC Energy and gives it a fair value estimate of $47, giving it downside of around 4.2%. The investment research firm gives stocks a rating of between one and five stars, with a top rating indicating that the shares are undervalued. It also has a four-star rating on SLB, previously known as Schlumberger. “We remain optimistic about SLB’s long-term outlook. As the energy transition continues, firms will need to rely on oil and gas for energy security. As such, international oil and gas activity is expected to provide steady opportunities for SLB over the next five years,” Ellis said. Morningstar has a fair value of $62 on stock, giving it around 24.3% potential upside. ExxonMobil As for ExxonMobil, it gives it a three-star rating and a fair value estimate of $133, which represents nearly 11% upside potential. Among the opportunities facing the company is its commitment to oil and gas, even as many of its peers are diverting investment to renewables, Ellis said. “It has responded to calls to bring in more outside voices to its board and announced emission-reduction targets. It’s also investing in low-carbon technologies, but these efforts are measured and keep oil and gas production at the core,” he said. “While this strategy is unlikely to win praise from environmentally oriented investors, we think it’s more likely to be more successful and probably holds less risk. Exxon’s investment strategy and will likely deliver superior returns.” APA Elsewhere in the energy segment, Ellis likes APA Corp . Calling it “deeply undervalued,” he believes “the market is deeply skeptical over its Suriname development potential, but I see the stock price as not pricing in any success there,” referring to its exploration projects in the South American country. “The situation effectively means investors are getting the upside from the development for free. This is a very attractive attribute in that we do not have to depend on oil or gas prices in the near-term for the stock to potentially deliver a very healthy return,” Ellis said.
