Navigating the Energy Sector's Lull: A Strategic Case for Undervalued Energy Stocks

The U.S. energy sector has entered a period of underperformance, driven by a confluence of factors: inflation-adjusted oil prices below breakeven thresholds for many producers, geopolitical tensions dampening near-term demand, and a shift in capital allocation toward efficiency over expansion. Yet, beneath this surface of stagnation lies a compelling opportunity for investors willing to look beyond short-term volatility. A select group of energy infrastructure and services stocks—trading at significant discounts to their intrinsic value—stand poised to benefit from a rebound in drilling activity and the eventual normalization of oil prices.

The Forces at Play: Oil Prices, Drilling Activity, and Market Sentiment

The U.S. Energy Information Administration (EIA) forecasts an average Brent crude oil price of $69 per barrel in 2025, with a further decline to $58 in 2026. While this trajectory reflects oversupply concerns and geopolitical stability, it also masks structural shifts. U.S. crude production, though near record highs, is projected to plateau and then decline as operators scale back drilling in response to weak returns. The rig count has fallen to 542 as of July 2025, a 7.5% drop year-over-year, with major basins like the Permian and Eagle Ford experiencing sharp reductions.

However, this retrenchment is not a sign of sector collapse but rather a recalibration. Energy companies are prioritizing capital discipline, debt reduction, and operational efficiency. For instance, Schlumberger (SLB), the industry's largest services firm, is leveraging its digital transformation to secure offshore projects in Latin America and West Africa—markets less sensitive to U.S. shale volatility. Similarly, Halliburton (HAL) is doubling down on electric fracturing and pressure-pumping solutions, which offer higher margins and align with decarbonization trends.

Identifying the Undervalued: A Contrarian Playbook

Morningstar's analysis highlights five energy infrastructure and services stocks trading at 17–31% discounts to their fair value estimates: Schlumberger, Halliburton, National Oilwell Varco (NOV), Weatherford International (WFRD), and Energy Transfer (ET). These firms are not merely cheap; they are positioned to capitalize on near-term catalysts:

1. Schlumberger (SLB): Despite a 31% discount to fair value, SLB's digital services—accounting for 30% of revenue—offer a moat in an industry increasingly reliant on data analytics and automation. Its exposure to offshore projects, which are less cyclical than onshore shale, provides a buffer against U.S. rig count declines.
2. Halliburton (HAL): Trading at a 29% discount, HAL's focus on high-margin electric fracturing and its strong balance sheet (debt-to-EBITDA of 1.8x) make it a compelling play. Its recent offshore contracts in Brazil and Mexico underscore its ability to diversify beyond North America.
3. Energy Transfer (ET): At a 17% discount, ET's $5 billion 2025 capital expenditure plan and expansion into natural gas liquids (NGLs) position it to benefit from rising LNG demand. Its fee-based revenue model offers stability, even in a low-growth environment.

The Inflation-Adjusted Oil Price Dynamic

While nominal oil prices have stabilized, inflation-adjusted prices remain below the $75–$80 range seen in 2023. This discrepancy creates a headwind for E&P firms but a tailwind for services and midstream players. For example, Energy Transfer's NGL pipelines and storage facilities are less sensitive to crude price swings than E&P peers. Similarly, Schlumberger's digital services, which command premium pricing, are insulated from the cyclical nature of oil.

The Dallas Fed Energy Survey underscores this trend: while E&P executives expect to cut drilling budgets by 3%, midstream and services firms report stable or improving cash flows. This divergence highlights the importance of sector positioning.

Strategic Considerations for Investors

For those with a medium-term horizon, the key is to focus on firms with:
- Low breakeven costs (e.g., Schlumberger's offshore projects, which require $45/barrel for breakeven).
- Strong balance sheets (e.g., Halliburton's $15 billion cash reserve).
- Exposure to secular trends (e.g., Energy Transfer's NGL infrastructure, which aligns with global LNG demand).

A diversified portfolio of these stocks could offer downside protection and upside potential as oil prices normalize. For instance, a 20% allocation to SLB, 15% to HAL, and 10% to ET, alongside midstream and EES plays, could balance risk and reward.

Conclusion: Patience as a Virtue

The energy sector's underperformance is a temporary setback, not a permanent condition. By focusing on undervalued infrastructure and services firms, investors can position themselves to benefit from the inevitable rebound in drilling activity and the eventual rise in inflation-adjusted oil prices. The path forward requires patience, but the rewards—both financial and strategic—are substantial for those who act now.