On the day I’m writing this, crude oil prices are falling on a surprise inventory build. This virtually assures that the OPEC+ nations will be maintaining their output cuts. And the inventory build comes on the heels of the announcement that the Biden administration will be releasing more fuel from the U.S. Strategic Petroleum Reserve. Despite all of these short-term headwinds, this is still a time to look for oil and gas stocks to buy.
For starters, analysts are forecasting a significant increase in natural gas demand. This will come from data centers that continue to use power for artificial intelligence (AI) applications. Second, at some point this year interest rates are likely to get cut. That will be bullish for oil consumption which will drive prices higher. Finally, although renewable energy sources are growing in scale, oil and gas still have a vital role to play in the world economy for decades to come.
Oil may be a difficult trade right now. But oil and gas stocks are generally solid long-term investments. Many of these companies are well capitalized and can reward shareholders through dividends in leaner times and through price appreciation and share buybacks when oil prices are higher. With that in mind, here are three oil and gas stocks to buy independent of the headlines.
Shell (SHEL)
Shell (NYSE:SHEL) is the big oil name on this list, and here’s why. In 2023, the London-based company generated $323.18 billion in total revenue. The sector leader, Exxon Mobil (NYSE:XOM) generated $341.09 billion in that same time. A similar story appears when you look at revenue per share with Shell generating $8.36 EPS and Exxon Mobil delivering EPS of $8.75.
With that in mind, it’s helpful to note that Shell trades at a forward price-to-earnings (P/E) ratio of 8.59 to Exxon Mobil’s 12.32. And you get a similar dividend yield with Shell coming in at 3.9%, which is higher than Exxon Mobil at 3.28%. If you’re looking for value, Shell stands out.
But what about growth? Analysts give SHEL stock a consensus price target of $83.41, which gives investors an 18% upside. Plus, 18 out of 28 analysts give the stock a Strong Buy rating.
Kinder Morgan (KMI)
Kinder Morgan (NYSE:KMI) is a midstream selection on this list of oil and gas stocks to buy. The company operates a network that includes approximately 79,000 miles of pipelines and 139 terminals. It’s a vast operation that runs throughout much of North America.
In addition to transporting crude oil, Kinder Morgan is one of the leading distributors of natural gas. On the company’s most recent conference call, it warned that data centers will drive up demand for natural gas as they support 24/7 AI applications.
It’s also, as I’ve written repeatedly, a fundamentally undervalued stock. KMI trades at 16.4x forward earnings. Plus, it has an attractive dividend with a current yield of 5.92%.
Analysts currently have a consensus neutral rating on KMI stock which has run up 19% in the last 12 months and 11% in 2024 alone. That suggests a pullback may be coming on the recent bearish news. But taking a long-term view, midstream companies will be the tip of the spear when oil prices swing bullish. Undervalued stocks like Kinder Morgan are likely to rally hard.
Enterprise Products Partners (EPD)
If the case for Kinder Morgan seems attractive, you may like Enterprise Products Partners (NYSE:EPD) even more. Like KMI, Enterprise Products Partners is one of the largest midstream energy companies with a network of pipelines spanning over 50,000 miles. The company is also a key player in the natural gas arena. Therefore, many of the same reasons to own KMI are in place for EPD stock.
However, one thing you should note about Enterprise Product Partners is that it’s a master limited partnership (MLP). That means, similar to a real estate investment trust (REIT) it’s required to distribute a sizable percentage of its earnings to shareholders in the form of a dividend. That gives EPD stock a juicy dividend yield of over 7% (7.23% as of this writing). Plus, the company is a dividend aristocrat having increased that dividend in each of the last 27 consecutive years.
On the date of publication, Chris Markoch 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.