SA Asks: What are the best energy stocks amid the Middle East crisis?

What are the best energy stocks for investors amid escalating tensions and military actions in the Middle East?

We asked Seeking Alpha analysts Ronald Ferrie, Fluidsdoc and Long Player for their thoughts.

Ronald Ferrie: The Middle East conflict holds the potential to disrupt both crude and refined petroleum product markets should damage to critical infrastructure continue. U.S. exploration and production, or E&P, companies should benefit from improving margins as crude prices rise. The conflict holds the potential to turn crude markets from oversupplied to undersupplied if Iranian supply is lost for any significant amount of time. As the situation deteriorates, it appears shippers are becoming unwilling to transport out of the Persian Gulf, potentially reducing supply out of the region.

Similar to the Ukraine/Russia conflict in 2022, war disrupts trade flows. As shippers become less willing to transport out of the Persian Gulf, a significant portion of global volume is at risk. If this endures for any significant amount of time, oil prices will likely spike in response. Rising tides lift all boats in a situation like this.

I believe the best positioned are companies with offshore assets. The low breakeven and long-term nature of these projects allow for premium margins in times of crises. Shell (NYSE:SHEL) stands out to me for a low valuation compared to other super major companies. Although more expensive, Exxon Mobil (NYSE:XOM) has a fantastic offshore program in Guyana. For investors with a longer-term horizon, APA Corp (NASDAQ:APA) and Total Energies (NYSE:TTE) are developing fields in Suriname by 2028.

Fluidsdoc: I feel U.S. and Canadian E&P stocks are undervalued in many respects. One is geopolitical advantage. The Mideast crisis reminds us of the vulnerability of oil infrastructure in this troubled region. This is particularly true now that the U.S. strikes on Iranian nuclear sites have added a new dimension to the picture.

Operators in North America are much less susceptible to the type of production interruption that could ensue in the event of an attack on infrastructure. Products such as crude, NGLs and gas move to market primarily on pipelines that don’t suffer from the Strait of Hormuz “pinch-point” potential. Exports from U.S. Gulf Coast and Canadian West Coast ports depart into open seas.

I see this as a structural advantage that is not yet reflected in the stock prices of these E&Ps. I feel like the “buy” thesis for U.S operators Devon Energy (NYSE:DVN) and EOG Resources (NYSE:EOG) as well as Canadian operators Suncor Energy (NYSE:SU) and Peyto Exploration (OTCPK:PEYUF) has only been enhanced as hostilities have escalated.

Long Player: A lot of stocks have already gotten that “energy bounce” because the market tends to correct for something like that right away. The good news is that energy is so out of favor there are many stocks that can be bought and held, no matter what happens with the Middle East.

The first are natural gas stocks, where natural gas pricing is expected to recover. This would benefit EQT (NYSE:EQT) and Peyto (OTCPK:PEYUF). After that, oil stocks that should do well, no matter what happens, include Permian Resources (NYSE:PR) and PrimeEnergy (NASDAQ:PNRG). Larger ones include Occidental (NYSE:OXY) and Exxon Mobil (NYSE:XOM). But no matter what you do, make sure you buy good management. That often more than makes up for investor mistakes.

Some stocks definitely got a bigger bounce due to the war. But you still want good management. Comstock Resources (NYSE:CRK) has been one very hot stock because it had a discovery and the war made the outlook better for the natural gas industry combined with the discovery. It is owned by Jerry Jones, who also owns the Dallas Cowboys. It may have further to go, but it also may drop back on any conclusion to the Middle East situation. That discovery could remake the company over time.