As autumn arrives and the weather cools, investors should closely monitor the energy sector. Oil and gas stocks have been stellar performers since summer 2022 as energy prices remain elevated, vastly outshining the overall market. With OPEC+ confirming additional output cuts recently, and global demand steadily recovering, the backdrop remains highly favorable for energy stocks over the next few months.
However, if we cut the timeline to this year only, the S&P 500 is up 16.4% year-to-date, but the Energy Select Sector SPDR ETF (NYSEARCA:XLE) is still underperforming, up only 9% thus far. Accordingly, numerous energy stocks still seem reasonably-valued, with room to advance. The sector continues to benefit from years of underinvestment, with supplies remaining tight as demand rebounds post-pandemic.
In addition, OPEC+ has been very aggressive with production cuts. These moves aim to put a firm floor under oil prices, demonstrating OPEC’s resolve to defend elevated prices amid economic uncertainty. With spare production capacity low worldwide, any supply disruptions could prompt further price spikes.
On the other hand, domestic natural gas prices have pulled back from summer peaks, but could quickly rebound if colder-than-normal weather spurs heating demand in the winter. Given the constructive supply-demand backdrop, investors should keep quality energy stocks on their watchlists. The following three energy stocks present attractive combinations of low costs, strong shareholder payouts, and leverage to climbing energy prices.
Neste (NTOIY)
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While most investors flock to the oil majors, this Finnish refining company offers exposure to rising energy prices with a rock-solid balance sheet. Neste (OTCMKTS:NTOIY) converts waste and vegetable oils into renewable diesel and sustainable aviation fuel, commanding substantial premiums over conventional diesel.
With two new production lines ramping up, Neste’s nameplate capacity is on track to reach 5.5 million tons by early 2024. Meanwhile, waste and residue feedstock shortages relative to renewable fuel demand allow Neste to capture very high per-ton margins.
Despite the company’s growth projects, Neste maintains a strong financial position. Its debt-to-equity ratio is in line with industry standards, with no issues funding its expansion. Still, the company has missed expectations by a fair margins, and analysts expect it to take two more years before sales start climbing meaningfully. NTOIY stock has now slumped over 50% from its 2021 peak, but I consider it to be a good opportunity right now, since most negatives are priced in. Analyst expectations are also something I’d take with a pinch of salt, since energy prices are not something that can be accurately forecasted. Neste also includes a 2.6% dividend yield, and now trades at just 13-times earnings.
As sentiment eventually recovers, Neste offers substantial upside with its world-class renewable fuel operations. This steady cash cow is poised to reward shareholders for years to come. It does not have much Wall Street coverage, but Gurufocus puts this stock at a fair price at $40.
Valvoline (VVV)
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While not a traditional energy company, Valvoline (NYSE:VVV) provides critically essential services to keep our vehicles running. This auto maintenance provider operates and franchises ~1,600 quick-lube service centers across North America.
Increased consumer driving has fueled tremendous demand at Valvoline centers. In the third quarter, system-wide same-store sales grew 12.5%. Additionally, transactions jumped 40% as customers brought vehicles in for routine maintenance after delayed services during the pandemic.
Higher volumes also drove Valvoline’s adjusted EBITDA up to 27.8%, showcasing the business’s operational leverage. While sales of oils and lubricants ebb and flow with costs, Valvoline’s essential auto upkeep services provide steady demand.
Management expects to deliver adjusted EBITDA between $375 million and $385 million for the full fiscal year. On the earnings front, rising interest rates prompted a retracement in Valvoline’s share price of nearly 20% since July. While macro headwinds persist, analysts forecast consistent revenue growth of around 15% per year through 2025.
Despite the recent pullback, VVL stock still trades above 26-times forward earnings. However, the company’s network expansion and quick-lube services have barely scratched the surface of their potential. Valvoline’s long-term outlook remains very compelling in my eyes. Eight wall street analysts have a consensus price target of $40 per share for VVL stock, implying 25%-plus upside potential in one year.
Enphase Energy (ENPH)
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Rather than traditional fossil fuels, solar leader Enphase Energy (NASDAQ:ENPH) provides exposure to the booming clean energy sector. Enphase manufactures microinverters that convert solar power from DC to AC current compatible with home electrical systems. The company also produces batteries that enable customers to harness solar energy anytime.
As the dominant U.S. residential solar player, Enphase is leveraging its pole position to capitalize on state renewable power incentives, most notably California’s updated NEM 3.0 net metering policy. Under NEM 3.0, California continues compensating homeowners at retail rates for excess solar power sent back to the grid, sustaining project payback periods.
Meanwhile, battery attach rates are spiking, turbocharging Enphase’s storage solution sales. With its Ensemble energy management platform and IQ batteries, Enphase empowers homeowners to consume self-generated clean energy around the clock.
Although analysts expect a temporary demand lull in late-2023 and early-2024 as installers adjust to the new California rules, Enphase sees tremendous tailwinds ahead. According to Mordor Intelligence, U.S. residential solar installations are poised to grow at a 16.5% compounded annual growth rate (CAGR) through 2028.
Beyond solar, Enphase is also entering the electric vehicle charging market in 2023, participating in another massive secular growth trend. I’m very optimistic about the EV charging market, since there is already quite a lot of pressure on charging infrastructure with only 1% of the cars on the road being EVs.
Enphase now trades at a bargain valuation of just 24-times forward earnings despite its staggering 34% revenue growth rate. As solar penetration rises globally, Enphase has barely scratched the surface of an enormous addressable market. This renewable energy juggernaut should richly reward patient investors over the next decade. The consensus price target of $189.40 for ENPH stock suggests 57% upside potential is possible over the next year.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
