(Bloomberg) — Here’s something you don’t see in the market too often: A third of all mid- and small-cap oil and gas stocks in the US are now trading below their book values.

That’s the highest level since the pandemic. And it’s a gift for value investors worshiping the gospel of Warren Buffett and his mentor, Ben Graham, who referred to these kinds of opportunities as “cigar butts.”

“We’re going to take advantage of a lot of suckers,” said Cole Smead, CEO of Smead Capital Management, who has been buying additional oil and gas stocks that are trading well below book.

Energy is the S&P 500’s second-worst performing sector in the second quarter and is leading the way lower on Thursday. It has lost roughly 14% since President Donald Trump’s April 2 tariff announcement, as crude prices tumble due to fears of global trade wars sparking economic slowdowns and OPEC member countries boosting production to increase supply. Two weeks ago, West Texas Intermediate crude fell to around $55 a barrel, a level it touched in April and before that February 2021. It has rebounded only modestly since then and remains down about 15% for the year.

Now, shares of oil and gas companies, including Murphy Oil Corp, Crescent Energy Inc. and Noble Corp., are trading for less than what the assets on their books are worth. That’s the classic definition of value investing, where the stock is priced at less than what the business would be worth if it was stripped and sold for parts.

At this point, 33% of Russell 3000 energy stocks are trading below their book values. The figure rose as high as 40% late last week, before the US and China agreed to a 90-day trade truce, which gave a slight boost to oil prices and energy stocks. The last time this happened, it preceded off a two-year run in 2021 and 2022 when energy trounced the market and was the top-performing sector.

A similar proportion of large- and small- Canadian oil and gas stocks have fallen into the same range. Smead, who is invested on both sides of the border, thinks the stocks are undervalued and poised to at least return to book value, and likely more.

Buying Cheap

“I don’t need to have a rosy picture” for the energy outlook to make money trading energy stocks, Smead said.

Smead isn’t alone in buying on the cheap. A handful of well-capitalized oil and gas companies have indicated they’ll be opportunistic, repurchasing their stock if it has sold off sharply. Cenovus Energy Inc. bought back C$62 million ($44 million) of its own shares in the first quarter and has nearly tripled that to C$178 million in the second quarter so far.

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“The smartest capital allocation today is to repurchase shares” rather than paying down debt, Diamondback Energy Inc. Chairman and CEO Travis Stice said on a May 6 conference call. “Buybacks are the right thing at these levels” as crude prices have slipped, Stice said, adding that he expects the Texas-based oil producer to increase its stock repurchase program.

To be sure, many oil and gas producers won’t be able to take advantage of their cheaper stock price because they don’t have the available cash. Chevron Corp., for instance, said it will cut buybacks in the second quarter following the drop in crude.

There’s also a debate about how best to value oil and gas producers. BMO Capital Markets analyst Jeremy McCrea says book value isn’t a useful measurement for the energy sector since it can change quickly and dramatically with commodity prices. He prefers cash flow, Ebitda and reserve values, but says the stocks still are cheap based on those metrics.

“Typically, the best times to invest in the energy sector are when it feels the most uncomfortable,” McCrea said. “And it’s pretty uncomfortable right now just given this uncertainty. That’s historically some of the better times to come into the market.”

—With assistance from Tom Contiliano.

(Updates oil price decine and energy sector performance in fourth paragraph.)

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