Oil prices continue to be volatile and hard to predict, which is why finding undervalued energy stocks can be hard, too. After rising steadily for most of March and April, crude prices just suffered their biggest weekly decline in three months as tensions in the Middle East ratchet down and global demand softens. Brent crude oil, the international standard, is currently trading at $83.78 per barrel, while West Texas Intermediate crude oil, the American benchmark, has fallen below $80 a barrel.
The current declines come amid deescalating tensions in the Middle East and on signs that the U.S. economy is slowing, putting downward pressure on oil demand forecasts. America remains the world’s biggest consumer of energy products such as oil and natural gas. At the same time, the economy in China, the world’s second-largest oil consumer, also continues to slump. All eyes are now on a meeting of OPEC+ oil producers that is scheduled for June 1.
The current situation is proving to be difficult on energy companies, particularly oil producers and refiners, pushing their share prices lower. Here are the three most undervalued energy stocks to buy in May 2024.
Marathon Petroleum Corp. (MPC)
Marathon Petroleum Corp. (NYSE:MPC) looks like a screaming buy with its share price down 15% in the last month. MPC stock is currently trading at just nine times future earnings estimates, and it offers shareholders a quarterly dividend payment of 82 cents a share, which is good for a yield of 1.82%. Even with the current pullback, Marathon Petroleum’s stock is still up 17% this year, 60% in the past 12 months and 237% over five years. The gas station chain has been a consistent winner for its shareholders.
The drop in the share price comes after Marathon Petroleum issued its latest financial results. The company managed to beat Wall Street forecasts on the top and bottom lines. For the year’s first quarter, Marathon Petroleum reported earnings per share of $2.58, which was ahead of the $2.54 expected among analysts. Sales in the quarter came in at $33.2 billion, which topped a consensus estimate of $32.01 billion. Unfortunately, the stock has been hurt by lower refining margins. Marathon is one of the biggest refiners.
Still, Marathon Petroleum returned $2.5 billion of capital to shareholders in Q1 through $2.2 billion worth of stock buybacks and $299 million of dividend payments.
Diamondback Energy (FANG)
Diamondback Energy (NASDAQ:FANG) has a potential multiyear catalyst with its $26 billion acquisition of Endeavor Energy Partners. The purchase of Endeavour gives Diamondback Energy the largest privately held oil and gas producer in the Permian Basin of Texas. Endeavour Energy’s operations span 350,000 acres in the Midland, Texas area of the Basin that straddles West Texas and eastern New Mexico. The additional land and operations will make Diamondback a top player in the oil-rich region.
Ahead of the deal closing, FANG stock looks a little undervalued, trading at 11 times future earnings estimates and offering a quarterly dividend of $2.32 a share for a monstrous yield of 4.6%. Diamondback Energy has also been a top energy stock over the past year, having risen 54% in the last 12 months, including a 28% gain in 2024. The purchase of Endeavour Energy is expected to close by the end of this year, paving the way for strong and sustained growth at Diamondback Energy.
British Petroleum (BP)
For a big international play, consider British Petroleum (NYSE:BP). The oil major’s stock looks undervalued right now trading at 12 times future earnings estimates and with a quarterly dividend payout of 44 cents a share, giving it a hefty yield of 4.6%. In the last year, BP stock has increased only 3%. Through five years, the company’s share price has declined 9%. Volatile crude oil and natural gas prices are to blame for the poor performance of BP stock. However, the company’s prospects continue to look bright, making BP a solid choice for investors looking for undervalued energy stocks.
Lower oil and gas prices led to weak fuel margins at the energy major, hurting its Q1 earnings and depressing the share price. However, BP is taking steps to keep its business humming despite ongoing volatility in energy markets. Management says they remain on track to deliver $2 billion in cost savings by the end of 2026, which should help improve margins. Additionally, the company continues to prioritize its shareholders, recently announcing a new stock buyback program of $3.5 billion for the first half of this year.
On the date of publication, Joel Baglole did not hold (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.