Stocks in the energy sector have faced some headwinds year to date. Much of this is due to lower oil and natural gas prices, as you can see in the 2-year charts below:

Other reasons are weaker-than-expected economic growth of China and looming recession fears in the U.S. 

As a result, the S&P 500 Energy Sector Index ($SREN) is down 10% year to date, compared to the S&P 500's ($SPX) and the 34.29% gain in the Nasdaq Composite Index ($NASX).

However, oil has experienced a 10% rally in the past month and could be gaining momentum. So I looked for attractive stocks within the energy sector and found three with decent dividend yields, strong fundamentals, and appear to be undervalued.

Chesapeake Energy (CHK) 

Oklahoma-based natural gas and oil exploration and production company Chesapeake Energy recently reported blowout results for Q1 2023.

The company reported revenues of $3.37 billion in the Jan - Mar '23 period, a whopping 260% yearly increase. It also comfortably surpassed the analyst estimates of $1.25 billion. 

Although its EPS of $1.87 witnessed a yearly decline of 39.5%, it came in above the street expectations of $1.55 per share. 

Chesapeake also reported an improvement in its cash flow generation capabilities in the first quarter too. Net cash provided by operating activities increased by 4.2% from the previous year to $889 million. However, a roughly 55% yearly decline in adjusted free cash flow to $241 million even after the Eagle Ford assets sale remains a concern.

Notably, the company expects to drill 35 to 45 oil wells and place 30 to 35 wells on production in the second quarter of 2023. Further, the company recently entered into an agreement with Swiss commodity trader, the Gunvor Group to supply 2 million tonnes per annum of LNG for a period of 15 years.

Both these developments provide revenue visibility for the company.

Meanwhile, Chesapeake has a dividend yield of 2.68%. Although the Chesapeake stock has declined by 3.1% so far this year, its valuations appear to be stable with a trailing PE of 1.78, PB of 1.07 and Price to Cash Flow of 2.64.

Additionally, analysts remain cautiously optimistic about the stock with an overall rating of “Moderate Buy” with a mean target price of $109.07, indicating an upside potential of about 31% from current levels. Out of 15 analysts covering the stock, 9 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating and 5 have a “Hold” rating.

Valero Energy (VLO)

Texas-based downstream petroleum company Valero Energy reported a mixed set of results for the Jan - Mar '23 period.

While revenues dipped to $36.4 billion from $38.5 billion, the EPS jumped to $8.30 from $2.21. However, both revenue and earnings surpassed the analysts' expectations.

Moreover, in Q1 2023, the company reduced its debt by $199 million. This can be attributed to the company's strong ability to generate cash from its operations as the net cash provided by operating activities recorded an impressive yearly jump of 439% to $3.2 billion in the Jan - Mar '23 period.

On the strategic front, the company's Port Arthur Coker project commenced operations in April. The project is expected to increase the company's throughput and enhance its ability to process sour crude oils along with improving its turnaround efficiency. Further, its partnership with BlackRock and Navigator's carbon sequestration project is expected to begin startup activities in late 2024. Valero's ethanol business is expected to receive a boost from this project as it is an anchor shipper in the project with eight of its ethanol plants connected to this system.

As these events unfold, Valero recently declared a regular dividend of $1.02 per share. The Valero Energy stock is trading at a dividend yield of 3.46% and the stock is up marginally in 2023 so far. Valuation-wise, the Valero Energy stock is trading at a trailing PE of 3.35, PB of 1.71 and Price to Cash Flow of 2.82.

Meanwhile, analysts are bullish about the stock attributing an overall rating of “Strong Buy” with a mean target price of $148.60, indicating an upside potential of about 23% from current levels. Out of the 16 analysts covering the stock, 12 have a “Strong Buy”, 2 have a “Hold”, 1 has a “Moderate Buy” and 1 has a “Strong Sell” rating on the Valeno Energy stock.

Phillips 66 (PSX)

Houston, TX-based Phillips 66 is a multinational energy company engaged in refining, marketing and transporting natural gas liquids and petrochemicals.

In Q1 2023, Phillips 66 reported a 4.3% yearly decline in revenues to $35.1 billion yet EPS jumped by more than threefold from the prior year to $4.20. However, on both counts, it surpassed the analyst estimates of revenues of $29.8 billion and EPS of $3.58.

However, a marginal yearly rise in net cash provided by operating activities to $1.2 billion and a 28% yearly increase in total debt to $18.5 billion remain concerns. Yet, a decline in the debt-to-capital ratio to 35% from 39% in the prior year hints at the company's improving capital adequacy.

Meanwhile, CPChem and Qatar Energy's petrochemical facilities remain on track. The facility at the US Gulf Coast, which is expected to commence operations in 2026, will include a 4.6 billion pounds per year ethane cracker and two high-density polyethylene units with a combined capacity of 4.4 billion pounds per year. Further, the company is also building one of the world's largest renewable fuels facilities by converting its refinery to San Francisco Refinery in Rodeo, CA. The project is expected to commence operations in Q1 2024.

Concurrently, the company recently increased its dividend by 8% to $1.05 per share and the Phillips 66 stock is now trading at a dividend yield of 4.1%.

Notably, the Phillips 66 stock is up 3% in 2023 so far. On the valuation front, the stock is trading at a trailing PE multiple of 4.85, PB of 1.55 and a Price to Cash Flow ratio of 4.39.

Additionally, analysts remain somewhat bullish on the Phillips 66 stock with an overall rating of “Moderate Buy” with a mean target price of $122.75, indicating an upside potential of about 18% from current levels. Out of the 14 analysts covering the stock, 8 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating and 4 have a “Hold” rating.

Final Takeaway

Though stocks in the energy sector will always be vulnerable to a myriad of uncertainties, ranging from geopolitical developments, demand issues, or supply constraints, the aforementioned companies are attractively valued compared to their peers, have strong fundamentals, and decent dividend yields. Further, these companies have exciting projects lined up which also provide increased revenue visibility.

Though all of the three stocks I discussed are attractive at current levels, the one I most favor is Valero Energy. Although it is more richly valued than Phillips 66 and Chesapeake, it's my favorite because of its robust cash-generating abilities, reduction of debt, EPS accretion and operational strength.