Even though oil prices have rebounded, the share prices of some energy industry players are still being undervalued by the stock market. That spells opportunity for investors.
So here are three top energy industry stocks -- Apache Corporation (NYSE:APA), Energy Transfer Partners (NYSE: ETP), and Kinder Morgan (NYSE:KMI) -- whose valuations look low and whose futures look bright.
An undervalued driller
After independent oil and gas exploration and production company Apache released its fourth-quarter 2017, its shares briefly dropped to their lowest levels since 2004. Apparently, the market was unimpressed by the company's near-term North American production outlook. The strange thing is that the company's Q4 earnings per share actually blew away analysts' expectations, coming in 50% higher than anticipated.
When something like that happens, it's a sign that maybe the stock market is mispricing the stock.
Apache has made some big changes to its operations over the past year and a half. In late 2016, it unveiled a monster oil and gas play in West Texas, which it dubbed Alpine High. In 2017, an analyst from investment bank Stifel suggested that Alpine High would add about $18 per share in value to the company, which sounds reasonable, given the volume of oil and gas that seems to be there. But Apache's stock is now trading at just over $34 per share. That would mean that the market is evaluating the rest of the entire company -- including its high-margin operations in Egypt and the North Sea -- at about $16 per share, which seems absurdly low.
After a year of building out infrastructure, Alpine High should come fully online this quarter, and production there is expected to grow by leaps and bounds over the next several years. And while investors wait, they'll have a best-in-class 2.9% dividend yield to keep them happy. That makes now a great time to buy into this undervalued driller.
A big payout for a song
A well-established, high dividend yield and an attractive valuation -- these are two great qualities to find in an investment, and they come together in master limited partnership (MLP) Energy Transfer Partners, which has one of the highest yields in the energy industry at a whopping 12.2%. Its P/E is very low at 10, and its enterprise value-to-EBITDA ratio -- which strips out depreciation in this high-depreciation sector -- is only slightly higher at 12.8.
Sounds like a great value. But for much of last year, it didn't look like one. The partnership's balance sheet is awash in debt, and it was only able to cover its distribution with some special help from parent company Energy Transfer Equity.
But the tide seems to be turning. When Energy Transfer Partners released Q4 2017 earnings, it announced a coverage ratio of 1.3 times, which -- even factoring in Energy Transfer Equity's help -- was a more than comfortable margin. The company also took some creative steps to pay down more expensive debt through asset sales and taking on some less expensive debt.
So, all of a sudden, that massive dividend seems a lot more secure, but the market hasn't bid up shares -- at least, not yet. That makes this a great time to snap them up at a bargain price. Just be aware of the tax implications of owning an MLP before you buy.
Holding a grudge
Have you ever gotten really angry with someone and then felt like you could never look at them the same way afterward? Well, that's what happened between the stock market and pipeline operator Kinder Morgan in 2015. The company slashed its quarterly dividend by 75% from $0.50 per share to just $0.125 per share. Investors sold the stock in droves, knocking its value from nearly $45 to under $15. It trades just above $16 as of this writing.
But that now looks like a bargain, given recent announcements by the company.
In January, Kinder Morgan reiterated its intention to pay an annual dividend of $0.80 per share for 2018, a 60% increase from the prior year. The company plans to increase its dividend to $1 per share in 2019 and $1.25 per share in 2020, as well as to implement a $2 billion share buyback program. CEO Richard Kinder declared himself "highly confident" that the company will meet those goals.
Kinder did a good job of meeting his goals in 2017, when the company paid down more debt than expected, achieving a net debt-to-adjusted-EBITDA ratio of 5.1 times, compared to management's projected 5.4 times. That puts it very close to its goal of a 5.0 ratio. It also repurchased about 14 million shares for about $250 million in December, or one-eighth of its overall repurchase goal.
Given Kinder Morgan's strong business, huge asset base, and favorable market outlook, the fact that investors are giving the stock the cold shoulder could be a case of "once bitten, twice shy." But there's really no need for investors to be shy of Kinder Morgan at these prices. Investors may want to buy in before the dividend increases begin with the Q1 2018 payout.
We all make mistakes sometimes, and the market is no different. Right now, it seems to be undervaluing shares of Apache, Energy Transfer Partners, and Kinder Morgan. That mistake represents a buying opportunity for alert investors.
Of course, in the energy industry, things can change quickly. Oil prices can soar -- or drop. Companies can make ill-timed acquisitions that don't help the bottom line. But the best remedy is to look for bargains when you can, and for me, these three stocks definitely qualify.