Countries are actively participating in the transition to renewable energy sources due to growing concerns over climate change. However, this transition to cleaner sources of energy is unlikely to affect the long-term demand for oil and gas significantly.
As the demand for oil and gas is expected to remain steady, it could be wise to buy fundamentally strong energy stocks Valero Energy Corporation (VLO), NGL Energy Partners LP (NGL), and Newpark Resources, Inc. (NR). These stocks are B-rated (Buy) in our proprietary rating system, POWR Ratings.
Before diving deeper into the fundamentals of these stocks, let’s understand what’s shaping the industry’s prospects.
Last year, oil posted its first annual loss since 2020 due to expectations of lesser demand from China and the rise in non-OPEC+ production. Crude oil prices have been stuck in a range for a while as there has been uncertainty over the demand and supply outlook. On the supply side, OPEC+, in a bid to boost sagging oil prices, has voluntarily cut oil production by 2.2 million bpd for the first quarter of 2024.
These cuts follow the previous production reductions announced after late 2022 to bring the total pledged cuts to 5.86 million bpd. Meanwhile, the demand outlook had taken a hit as there were expectations of subdued demand from top consumer China and a slowdown in the global economy. Additionally, crude oil supply has remained steady as non-OPEC+ nations ramped up production.
The U.S. is expected to produce a record 13.2 million b/d of crude oil in 2024. However, oil demand is likely to get a boost as the Chinese economy grew strongly in the fourth quarter, with its GDP growing 5.2%, compared to the third quarter’s 4.9% growth. The economy expanded 5.2% last year. Moreover, with the Federal Reserve indicating rate cuts this year, the U.S. economy could continue its growth, thereby driving the demand for crude oil.
Meanwhile, Israel’s military believes that the war in the Gaza Strip could continue through 2024. Moreover, the conflict is spreading across the Middle East, with Iran launching attacks on Syria, Iraq, and Pakistan. Also, the Iran-aligned Houthis have been frequently attacking cargo ships on the Red Sea, and in case commercial vessels are forced to change routes, then oil demand could rise as the journey gets longer.
The IEA has forecast that global oil demand will rise by 1.2 million barrels per day this year compared to 2023, raising its outlook for the third consecutive month. It expects world oil demand to grow by 1.8 million barrels per day in 2025, driven by global economic growth and solid activity in China.
Similarly, OPEC, in its January Monthly Oil Market Report, said it expects oil demand to rise by 2.25 bpd this year and 1.8 million bpd next year. It has been forecasted that oil demand growth in 2025 will be driven by nearly 1.7 million bpd growth in countries like China, India, and the Middle East. JPMorgan expects world oil demand to reach 106.9 mbd by 2030.
Furthermore, given the continued dependence on oil and gas, companies related to oil and gas drilling, production, transportation, evaluation, and maintenance are expected to thrive. The global oilfield services market is projected to grow at a CAGR of 5.6% to reach $421.31 billion by 2030.
Considering these conducive trends, let’s discuss the fundamentals of the featured energy stocks.
Valero Energy Corporation (VLO)
VLO manufactures, markets, and sells transportation fuels and petrochemical products internationally. It operates through three segments: Refining, Renewable Diesel, and Ethanol.
VLO’s revenue has grown at a 26.9% CAGR over the past three years and a 6% CAGR over the past five years. Its EBITDA has grown at a 79.3% CAGR over the past three years. Its total assets have grown at 6.9% CAGR over the past three years.
VLO’s revenues for the third quarter ended September 30, 2023, came in at $38.40 billion. Likewise, its operating income came in at $3.50 billion. The company’s adjusted net income attributable to VLO stockholders stood at $2.62 billion. In addition, its adjusted EPS rose 4.9% over the prior-year quarter to $7.49.
Street expects VLO’s revenue for the quarter ending June 30, 2024, to increase 5.2% year-over-year to $36.32 billion. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 7.9% to close the last trading session at $129.12.
VLO’s POWR Ratings reflect its solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #7 out of 82 stocks in the Energy – Oil & Gas industry. It has an A grade for Quality and a B for Value. Click here to see the other ratings of VLO for Growth, Momentum, Stability, and Sentiment.
NGL Energy Partners LP (NGL)
NGL engages in the transportation, storage, blending, and marketing of crude oil, natural gas liquids, refined products/renewables, and water solutions. The company operates in three segments: Water Solutions, Crude Oil Logistics, and Liquids Logistics.
On January 22, 2024, NGL announced that NGL Water Solutions was commencing the expansion of its Lea County Express Pipeline System from a capacity of 140,000 barrels of water per day to 340,000 barrels per day in 2024.
The addition of a second large-diameter pipeline, disposal wells, and facilities will significantly expand the capabilities of NGL’s existing produced water super-system and create a larger outlet for produced water disposal within the Delaware Basin.
NGL Water Solutions’ EVP Doug White said, “Today’s announcement highlights our investment in the long-term future growth and reliability of our infrastructure, which provides our customers with confidence to plan their long-term developments in the Delaware Basin. This large minimum volume commitment provides additional cash flow certainty to the Partnership as NGL continues to improve its balance sheet.”
NGL’s revenue has grown at an 8.9% CAGR over the past three years. Its EBITDA has grown at a 6.1% CAGR over the past three years. Its levered FCF has grown at 75.9% CAGR over the past three years.
For the fiscal second quarter ended September 30, 2023, NGL’s total revenues amounted to $1.84 billion. Its operating income rose 25.1% year-over-year to $86.03 million. The company’s adjusted EBITDA increased 23.9% over the prior-year quarter to $176.21 million. Its net income attributable to NGL rose 698.5% year-over-year to $28.03 million.
Analysts expect NGL’s EPS for the quarter ending March 31, 2024, to increase 139.2% year-over-year to $0.20. Its revenue for fiscal 2025 is expected to increase 0.5% year-over-year to $7.88 billion. Over the past nine months, the stock has gained 77.2% to close the last trading session at $5.28.
NGL’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
Within the A-rated MLPs – Oil & Gas industry, it is ranked #10 out of 26 stocks. It has a B grade for Growth, Value, and Momentum. To see the other ratings of NGL for Stability, Sentiment, and Quality, click here.
Newpark Resources, Inc. (NR)
NR provides products, rentals, and services primarily to the oil and natural gas exploration and production (E&P) industry. It operates through two segments: Fluids Systems and Industrial Solutions.
NR’s revenue has grown at a 13.5% CAGR over the past three years. Its levered FCF has grown at 6.3% CAGR over the past three years.
NR’s revenues for the fiscal third quarter that ended September 30, 2023, came in at $198.50 million. Its adjusted net income rose 59.5% year-over-year to $8.35 million. The company’s adjusted EBITDA increased 13.5% year-over-year to $22.26 million. Also, its adjusted EPS came in at $0.09, representing an increase of 50% year-over-year.
For the quarter ended December 31, 2023, NR’s EPS is expected to increase 14.3% year-over-year to $0.08. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past nine months, the stock has gained 57% to close the last trading session at $6.31.
NR’s POWR Ratings reflect this positive outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #7 out of 52 stocks in the Energy – Services industry. It has an A grade for Sentiment and a B for Value and Momentum. Click here to see the other ratings of NR for Growth, Stability, and Quality.
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VLO shares were unchanged in premarket trading Tuesday. Year-to-date, VLO has declined -0.68%, versus a 1.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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