In overvalued markets, finding bargain-priced stocks can be particularly difficult. But there are many hidden gems right now if you know where to look. Energy sector stocks, in particular, look attractive. Rising prices for crude oil over the last three months have given a boost to some of those companies' stock prices, but despite that, these three are still trading at attractive levels. And that's not the only reason they might appear appealing to you.

Phillips 66

Phillips 66 (NYSE:PSX) had a bad fourth quarter -- but that was expected. The refiner reported a loss of $539 million. Its refinery utilization rate fell to 69%, both due to a slump in demand for its end products and the company's planned turnaround and maintenance activity.  

XLE Total Return Level Chart

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Phillips 66's weak performance reflected the challenging situation in the refining market. Its peers reported similar losses. Companies are closing or converting high-cost refineries in response to low demand. While that sounds bleak, the outlook shouldn't be. As COVID-19 vaccines are distributed widely and the pandemic is contained, it is expected that people will return to their old driving and travel habits, boosting the demand for gasoline and other products.

Phillips 66 is one of the better-placed refiners to sail through this rough patch. First and foremost, its balance sheet is one of the strongest among its peers.

PSX Debt to Equity Ratio Chart

PSX Debt to Equity Ratio data by YCharts

Secondly, Phillips 66 is positioning itself for the anticipated transition to cleaner fuels. In the near term, this includes expanding its renewable fuel production capacity. By the middle of this year, the company's San Francisco refinery should be converted to produce 8,000 barrels per day of renewable diesel. It expects to convert the refinery fully by 2024 to give it a renewable diesel production capacity of 50,000 barrels per day.

In the medium to long term, Phillips 66's management sees many opportunities in the transition to cleaner fuels. These include the supply of specialty graphite that's used in the production of lithium-ion batteries. The company is also working on the development of solid oxide fuel cell technology to generate hydrogen. So Phillips 66 is well-positioned to supply petroleum-based products now, and cleaner fuels over time as they continue to become more economically viable.

For investors, that should mean a growing dividend -- and the stock already offers an extremely attractive yield of 5.3% at current share prices.

PSX Dividend Yield Chart

PSX Dividend Yield data by YCharts

TC Energy

Though President Joe Biden's decision to revoke the presidential permit for the construction of TC Energy's (NYSE:TRP) controversial Keystone XL pipeline recently grabbed the headlines and left investors in the company concerned, the development does not materially change the company's prospects. For perspective, that project's total cost was expected to be nearly 12 billion Canadian dollars. Excluding Keystone XL, TC Energy's capital plans through 2023 still include roughly CA$20 billion of growth projects. Moreover, it placed nearly CA$5 billion worth of projects into service in 2020. 

While the company may need to look for other growth avenues, it has a stack of projects remaining. Moreover, the cancellation of Keystone XL removes the associated regulatory and environmental uncertainties from TC Energy's list of concerns, and spares it the expenses of the project. The company still expects to grow its dividend by 8% to 10% in 2021, and 5% to 7% in the years beyond that. 

TC Energy's regulated gas and liquids pipelines generate a steady income. Further, the company's remaining assets are largely backed by long-term contracts. Roughly 95% of TC Energy's earnings come from regulated or long-term contracted assets. For this reason, the company has been able to increase its dividend for 20 consecutive years. And with the shares yielding 5.6% at current prices, this stock is a screaming buy.

Three pipelines under blue sky.

Image source: Getty Images.

Enterprise Products Partners

Like TC Energy, U.S. pipeline operator Enterprise Products Partners (NYSE:EPD) offers everything that income investors are looking for. For starters, it is structured as a master limited partnership (MLP), which means some additional work for shareholders when tax season rolls around. However, given a yield that's currently around 8.8%, the additional work could well be worth it.

Enterprise Products Partners has raised its distributions (MLP-speak for dividends) for 22 years in a row. Much of the credit for that streak should go to management's financial discipline and the company's diversified operations.

Moreover, around 87% of the company's earnings are fee-based, allowing it to generate relatively stable income even when the commodity prices are volatile. It has recently witnessed strong demand for its natural gas liquids assets, which offset the weakness in demand for its crude oil and natural gas assets. The company has an approved projects pipeline of $1.6 billion for 2021 that should drive its earnings growth. 

Another key strength of Enterprise Products Partners is its balance sheet. With a debt-to-EBITDA ratio of 3.5, it is one of the least leveraged midstream companies. In the first nine months of 2020, it generated distributable cash flow that was 1.6 times the distributions paid, giving it plenty of cushion to cover its payouts. All of the above factors make Enterprise Products Partners stock a convincing buy.


This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.