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3 Cheap Energy Stocks to Buy Right Now

By Tyler Crowe – Jan 14, 2022 at 9:03AM

Key Points

  • MPLX is generating loads of cash and returning it to shareholders in a multitude of ways.
  • Transocean could benefit immensely if offshore development picks up with high oil prices.
  • Canadian Solar's 2022 projections make it look cheap right now.

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The market has pretty low expectations for these stocks right now, and investors can benefit from that pessimism.

Cheap stocks are hard to come by these days. Sure, there are lots of stocks well off their 52-week highs, but are they truly cheap or just cheaper than they were?

A cheap stock is one that has an opportunity to outperform the expectations Wall Street has set for it right now. But even after some recent declines, there aren't a lot of stocks with low expectations. 

There are a few exceptions, though. Three stocks that look particularly cheap right now in the energy sector are oil and gas pipeline-company MPLX (MPLX 0.01%), offshore-rig owner Transocean (RIG 8.08%), and solar-power developer Canadian Solar (CSIQ 0.13%). Here's why these three look cheap and could exceed Wall Street expectations.

Oil wells and solar panels in a field at sunset.

Image source: Getty Images.

More and more cash to investors

It can be hard to say that a stock has done well when its stock price is down 11% over the past five years. When you add in MPLX's generous payout, though, its total return over the past five years is 42.7%. As a pipeline and transportation company, its business has been less impacted by weak oil and gas prices over the past several years. This has allowed management to steadily grow the business while returning lots of cash to investors.

Today, MPLX is in an even better situation, at least from an investor standpoint. It has completed most of its major development projects, its balance sheet is in relatively good shape, and it's generating more-than-enough cash to support its distribution -- currently yielding 9.1%. Management is so confident in its current financial position that it issued a $600 million special dividend in the fourth quarter and repurchased $465 million worth of units through the first three quarters of 2021. (As a master limited partnership, MPLX has units instead of shares.)

There aren't a lot of opportunities for MPLX to grow the business right now. There's been an immense amount of oil and gas infrastructure built over the past several years, so the opportunities to build new infrastructure are fewer and further between.

Management, however, can continue to grow shareholder value through a combination of small growth projects, buying back units, and maintaining a generous dividend. An annual distribution yield greater than 9%, with a chance at special dividends and modest payout growth, sounds like a rather cheap and attractive option right now. 

Transocean: Improving offshore economics 

The offshore-rig industry took it harder than any other segment of the oil and gas industry since oil prices collapsed back in 2014. Offshore exploration and development budgets dried up, and an immense oversupply of rigs left many operators with large fleets and even larger debt loads -- but no customers. Today, though, things are finally starting to look up for the few remaining players in this devastating industry, and Transocean could be a large beneficiary as the market rebounds.

Hundreds of rigs have been sent to the scrapyard over the past several years, leaving oil companies with fewer options to rent. Also, offshore-drilling activity is starting to pick up again. Transocean estimates there'll be 73 drilling and development programs contracted over the next 18 months.

These two things are adding up to higher rates for rigs. In 2020, average rates were below $250,000 per day. The most recent rig contracts handed out have been in the $300,000 to $350,000 per-day range -- a rate at which Transocean says it could generate lots of free cash flow and significantly pay down debt for several years.

With several drilling opportunities coming at higher rates, Transocean could benefit immensely. Eleven of its rigs are currently available for a contract, and another 16 of them will finish up their existing contracts over the next 1 1/2 years. The next year could be a huge one for Transocean, and its current $2 billion market cap may not be pricing in that opportunity. 

CSIQ Total Return Price Chart

CSIQ Total Return Price data by YCharts.

If management is right, Canadian Solar is cheap

Canadian Solar can be a hard business to follow because it's really two businesses in one. One part manufactures solar panels and associated components, while the other is a project-development arm building solar-power plants and battery-storage facilities.

The first is a relatively predictable but lower-margin business, while the latter can be high margin when it delivers lots of projects. If management's estimates for 2022 are right, though, the solar stock should be in for a monster year and doesn't currently reflect that. 

In 2022, Canadian Solar expects both sides of the business to grow immensely. On the manufacturing side, it expects to grow solar-module shipments from 14.5 Gigawatts (GW) in 2021 to 20 to 22 GW in 2022, thanks to some new facilities coming on line. It also expects project sales to jump 50% in 2022 to between 2.4 GW to 2.9 GW.

Over the past year, Canadian Solar's stock was down 47%. That's understandable because margins were weaker in 2021 and growth stalled. With so much new capacity coming on line in 2022 and a big year for project development, though, Canadian Solar looks incredibly cheap right now. 

Tyler Crowe owns MPLX LP and Transocean. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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