Amid ongoing geopolitical tensions, oil prices are trending higher this year and that’s positively affecting energy stocks. Year-to-date, the cap-weighted S&P Energy Select Sector index is higher by almost 9%, extending a three-year run in which the gauge has gained about 92%.
That’s an impressive run, but it doesn’t imply that the sector is bereft of attractively valued stocks. Actually, there are some deals to be had in the space and the Invesco S&P 500 Equal Weight Energy ETF (RSPG) is one of the exchange traded funds providing access to a variety of traditional energy stocks currently sporting compelling valuations.
RSPG allocates about 66% of its roster to large and mid-cap value stocks, but that hasn’t hindered performance. The ETF is up nearly 8% year-to-date and has gained almost 96% over the past three years. Even with that stellar run, the fund offers investors credible value opportunities.
RSPG Has Solid Value Credentials
The $565.4 million RSPG holds 25 stocks, none of which exceed a weight of 5.22%. That makes the fund highly diverse relative to cap-weighted counterparts. Those funds typically devote close to 40% of their portfolios to just Exxon Mobil (XOM) and Chevron (CVX) – the two largest domestic oil producers.
Speaking of Chevron, which accounts for 4.22% of the RSPG roster, that’s one of the energy stocks viewed as undervalued by Morningstar Managing Director Allen Good. Enviable positioning in the Permian Basin and solid capital management are among the factors supporting the Chevron thesis. Plus, the company is establishing a footprint in the decarbonization space.
“It recently tripled its investment to $10 billion cumulatively by 2028. With this capital flowing to emerging low-carbon areas that fit with Chevron’s existing value chains and experience. Greenhouse gas reduction projects and carbon capture and offset will enable Chevron to achieve its emission targets. While investments in hydrogen and renewable fuels will give it a toehold in emerging businesses that could expand in the future,” noted Good.
Another Attractively Valued Holding
Exploration and production name Devon Energy (DVN) is another RSPG holding deemed to be attractively valued by Morningstar. Devon accounts for 4.21% of the ETF’s portfolio. Additionally, it has divested some lagging, riskier assets and has focused on domestic opportunities and firming its balance sheet.
“The firm was the first US exploration and production company to implement a variable dividend to funnel excess cash to shareholders, and the strategy was warmly received by the market when it came into effect in 2021 (when Devon was the top performer in the S&P 500),” added Good. “After 50% of free cash has been distributed in cash the remainder will fund buybacks and strengthen the balance sheet. We prefer cash returns during upcycles. When firms are more flush with cash but also when stock prices are typically higher.”
Hess (HES) and Schlumberger (SLB), which combine for 8.64% of RSPG’s weight, are also considered undervalued by Morningstar.
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