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3 Beaten-up Energy Stocks: Are They Bargains?

Reuben Gregg Brewer, The Motley Fool

Energy-related stocks took a huge hit across the board when oil prices started to tumble in mid-2014. Some have come back strong; others are still reeling from the pain. If you're looking for bargains, then still-suffering stocks like ExxonMobil Corporation (NYSE: XOM), Holly Energy Partners, L.P. (NYSE: HEP), and Helmerich & Payne, Inc. (NYSE: HP) should all be on your short list. But are they worth buying today?

1. The giant looks cheap

Exxon is one of the largest integrated oil and natural gas companies in the world. It has been facing some headwinds on the production front (it pumped less oil year over year in each of the last two years), and its return on capital employed has been relatively weak as of late. It has plans to fix these problems, but it's going to take some time to get this giant ship moving in the right direction again. 

A hand drawing a scale weighing value and price

Image source: Getty Images.

Investors have shunned the stock in favor of European rivals, leaving Exxon's dividend yield at around 4%, the high end of its historical range. One thing to remember, though, is that the company has increased its annual disbursement every year for 36 consecutive years, including through the deep oil downturn -- which can't be said of most of its peers. Also, its price to tangible book value hasn't been as low as it is today since the late 1980s. If you are an energy investor looking for value-priced stocks, Exxon is worth a deep dive today for income and appreciation as it improves its execution over the next few years.   

2. Shifting to a new way of growth

Holly Energy Partners is a midstream limited partnership controlled by refiner HollyFrontier Corporation. Early in Holly Energy's life, its growth was fueled by HollyFrontier selling its assets, known as drop-downs. Those drop-downs led to an impressive string of 14 consecutive annual distribution increases. But HollyFrontier doesn't have anything left that it can sell to Holly Energy. So, the partnership has to find new ways to grow.   

This is a big change, and investors appear worried that it won't be a smooth transition. That's not unreasonable. However, with the stock still down by around a third from its 2014 highs and sporting a yield of more than 9%, it's worth a close look for bargain-focused investors. To put that yield into perspective, industry bellwether Enterprise Products Partners L.P.'s yield is around 6%.

HEP Dividend Yield (TTM) Chart

HEP Dividend Yield (TTM) data by YCharts.

Where will growth come from? Holly Energy is focusing on ground-up construction and expansion projects at existing facilities. It has about $50 million in expansion projects slated for 2018. It also hopes to partner with parent HollyFrontier on future acquisitions. There are two big takeaways here. First, distribution growth is likely to slow down from its previous levels, and growth is going to be less certain going forward. However, based on Holly Energy's strong history and the fact that HollyFrontier is a supportive parent, it's probably worth giving Holly Energy the benefit of the doubt as it transitions to a new stage in its business lifecycle. You can collect a nearly 10% yield while the partnership proves it can still find ways to grow.   

3. Technology is leading the way

Helmerich & Payne is a leading provider of oil and gas drilling equipment and services in the U.S. onshore market. It watched its active rig count fall from 297 in early fiscal 2015 to just 87 at its worst point in fiscal 2016. Revenues and earnings fell sharply, as you might expect. In short, the oil downturn took a huge toll on HP. 

But things are starting to look better. Rig utilization has increased dramatically, with 218 rigs currently working. And it increased its U.S. onshore market share by more than 4% since the downturn, twice the gain of its closest peer. The problem is that to keep ahead of the pack, Helmerich & Payne is constantly investing in its fleet to keep it cutting edge. So the company is still losing money despite the energy upturn as it pays to upgrade its offering to customers.   

HP Price to Tangible Book Value Chart

HP Price to Tangible Book Value data by YCharts.

The shares are still down by more than 40% from their 2014 peak. And the company's price to tangible book value remains lower by about 33%. While its tangible book value is well off the bottom hit at the worst of the downturn, they are nowhere near peak valuation levels. If you believe U.S. onshore drilling has a bright future, which seems to be the opinion of some of the world's largest oil drillers (including Exxon, which has been expanding aggressively in the space to help boost production results), then Helmerich looks like a good value today. And you can collect the stock's 4% yield while you wait for more of the company's high-tech rigs to be put back into action, and for the costs associated with upgrades to wane. 

Time for some deep dives

Exxon, Holly Energy, and Helmerich & Payne all continue to struggle a bit even though the energy sector appears to have turned a corner. And while the story behind each is slightly different, there's a common theme: You can collect generous yields while these companies work their way back into investors' good graces. Exxon and Helmerich have clearer outlooks than Holly Energy, but Holly's 9% yield is ample compensation for the added uncertainty. All three are worth further research if you like bargain-priced stocks.

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Reuben Gregg Brewer owns shares of ExxonMobil. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.