Investors might be overlooking some prime opportunities in the energy sector, according to a new research note from Morgan Stanley (MS). While Wall Street has been hyper-focused on mega-cap tech and artificial intelligence (AI) stocks, it's actually energy stocks that have contributed the most to overall S&P 500 Index ($SPX) earnings in the post-pandemic era, according to the firm's research.

And according to industry forecasts, the global oil and gas market is expected to top $9.4 trillion by 2028, even amid an ongoing push toward more sustainable energy sources.

Against this backdrop, Morgan Stanley has gone “Overweight” on the energy sector, up from its earlier rating of “Neutral.”

“Taking the Fed’s recent messaging into account and assuming it is less concerned about inflation or looser financial conditions, commodity-oriented cyclicals and energy in particular could be due for a catch-up," wrote a team of analysts led by Mike Wilson, noting that energy stocks have lagged underlying commodity gains. They also described the energy sector as "one of the cheapest and most under-owned areas of the market."

With this in mind, here are 4 energy stocks that Morgan Stanley considers its top sector picks right now.

Energy Stock #1: ConocoPhillips

Created in 2006 by the merger between Conoco (founded in 1875) and Phillips Petroleum (founded in 1893), Texas-based ConocoPhillips (COP) is an independent exploration and production company. They focus on finding, developing, and producing oil (CLK24) and natural gas (NGK24) reserves around the world. COP's market cap currently stands at an impressive $148.2 billion.

ConocoPhillips stock is up 8.7% on a YTD basis, and it offers a forward dividend yield of 1.84%.

Overall, analysts have deemed COP stock a “Moderate Buy,” with a mean target price of $132.67. This indicates an upside potential of about 5.3% from current levels. 

Out of 22 analysts covering the stock, 14 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 7 have a “Hold” rating.

Energy Stock #2: Devon Energy

Founded in 1971 by the father-and-son duo of John H. Nichols and Larry Nichols, Devon Energy (DVN) is an independent exploration and production company with a focus on finding, developing, and producing oil and natural gas reserves, primarily onshore in the United States. In 2023, Devon produced 600,000 barrels of oil equivalent per day. The company's market cap is currently at $30.98 billion.

Devon Energy's share price is up 8.7% on a YTD basis. It also offers a forward dividend yield of 1.80%. Further, with a payout ratio of 42.4%, there's scope for increasing those dividends.

Analysts have an average rating of “Moderate Buy” for DVN stock, with the mean target price of $53.62 denoting an upside potential of roughly 8.9% from current levels.

Out of 22 analysts covering the stock, 12 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, and 8 have a “Hold” rating.

Energy Stock #3: Occidental Petroleum

Arguably Warren Buffett's favorite energy stock, Occidental Petroleum (OXY), is next up on our list. Around since 1920, Occidental Petroleum is engaged in oil and gas exploration and production. Their operations span across the U.S., the Middle East, and Latin America. They also have a midstream and marketing segment involved in buying, selling, transporting, and storing hydrocarbons. OXY currently commands a market cap of $56.1 billion.

OXY stock is up roughly 7% on a YTD basis, and offers a dividend yield of 1.39%. With a payout ratio of just 20.57%, the company has room to further increase dividends going forward.

Analysts have a consensus rating of “Moderate Buy” for OXY stock with a mean target price of $67.67. This suggest an upside potential of about 5.9% from current levels. 

Out of 18 analysts covering the stock, 6 have a “Strong Buy” rating, 11 have a “Hold” rating, and 1 has a “Strong Sell” rating.

Energy Stock #4: Diamondback Energy

We conclude our list with Midland, Texas-based Diamondback Energy (FANG). An oil and gas exploration and production company, Diamondback focuses on acquiring, developing, and exploiting oil and natural gas reserves, primarily located in the prolific Permian Basin of West Texas. FANG's market cap is currently at $35.1 billion.

Diamondback stock is up an impressive 26.3% on a YTD basis. The stock offers a dividend yield of 1.85% with a payout ratio of 45.06%, suggesting FANG's dividends are well-covered by earnings.

Overall, analysts have a rating of “Strong Buy” for FANG stock, with a mean target price of $194.35. Although the outperforming energy stock has already passed this mark, the Street-high target price of $250 indicates an upside potential of about 27.6% from current levels. 

Out of 23 analysts covering the stock, 19 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 3 have a “Hold” rating.