Fueling Profits: Why Falling Gas Prices Signal a Buying Opportunity in Energy Stocks

The U.S. retail gasoline price average of $3.19 per gallon as of May 22—marking a 11% decline from Memorial Day 2024 levels—has sparked debate over whether drivers are benefiting or investors are missing a critical signal. While headlines focus on the immediate relief at the pump, the data tells a deeper story: multi-year lows in gasoline prices are creating a rare opportunity to buy undervalued energy stocks with strong fundamentals.

The Contrarian Case for Energy Stocks

Falling gas prices are often perceived as negative for energy equities, but the reality is far more nuanced. The $3.19 average (down from $3.71 in 2024) reflects structural shifts in supply and demand that favor midstream infrastructure and refining firms:

1. Oversupply and Stability: Crude prices have dropped to $64/barrel, down 26% from 2024, reducing input costs for refiners. Meanwhile, OPEC+'s production increases and U.S. shale output have created a buffer against geopolitical shocks, easing volatility.
2. Seasonal Demand Resilience: Despite gas prices hitting lows, Memorial Day travel is projected to hit 39.4 million road trips—a 3% increase over 2024. This shows demand remains robust, even as prices drop, signaling refiners' margins could stabilize.
3. Midstream's Inevitable Role: Pipelines and storage networks—managed by firms like Kinder Morgan (KMI) and Targa Resources (TRGP)—are critical to moving the growing 20 bcfd of natural gas expected by 2030. Their fee-based models are immune to gas price swings.

Targeting Midstream: The Undervalued Engine of Energy

Midstream firms are the unsung heroes of the sector. Their predictable cash flows (95% fee-based for KMI) and low commodity exposure make them ideal for contrarian investors. Key names to watch:

• Kinder Morgan (KMI): With a $8.8 billion project backlog (including LNG-export-focused pipelines like Mississippi Crossing), KMI is poised to benefit from rising U.S. gas exports. Its dividend yield of 4.9% (up from 3.8% in 2023) and $0.295/share dividend (8-year growth streak) offer both income and growth.
• Targa Resources (TRGP): Maintained $4.75B EBITDA guidance despite market headwinds, while buying back shares at depressed prices. Its 3.5% dividend yield and exposure to NGL processing (a $90B cash flow sector through 2025) make it a top pick.
• ONEOK (OKE): Trading at 18% below Morningstar's $100 fair value estimate, OKE's 4.91% yield and $8.225B EBITDA guidance align with its pipeline expansion plans in the Permian Basin.

Dividend Refiners: Value in Volatility

While refiners face margin pressures in the short term, select names offer compelling dividend yields and growth catalysts:

• ExxonMobil (XOM): With a 3.8% yield and 21% discount to its $135 fair value estimate, XOM's $84B in free cash flow (2021–2024) funds dividends and buybacks. Its focus on oil (versus renewables) aligns with global energy demand trends.
• EOG Resources (EOG): A 3.5% yield and 15% undervaluation vs. its $131 fair value, EOG's low payout ratio (35% of cash flow) ensures dividends remain sustainable even in a down cycle.

The Risks, and Why They're Manageable

Critics will cite risks like OPEC+ policy shifts or economic slowdowns, but midstream's project backlogs and refiners' balance sheets mitigate these:
- Regulatory Risks: Minimal impact on midstream's core infrastructure.
- Commodity Volatility: Midstream's fee-based models and refiners' hedging strategies absorb shocks.

Act Now—Before the Rebound

With gasoline prices at multi-year lows and 2025's EBITDA guidance intact for midstream leaders, this is a high-conviction entry point. The sector's 14% real-term decline in gas prices since 2022 has created a buying opportunity in stocks that are undervalued but positioned to thrive as demand stabilizes and infrastructure needs grow.

Bottom Line: Falling gas prices aren't a death knell for energy—they're a contrarian's roadmap to high-yield, growth-oriented stocks. Investors who act now can capitalize on midstream's structural tailwinds and refiners' resilience, turning today's lows into tomorrow's gains.

Data as of May 26, 2025. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.