Despite the ongoing transition to renewable energy sources like solar and wind, oil and gas demand will likely continue. Due to rising energy needs, oil and gas demand is expected to grow, fueling the demand for energy services, including oilfield services, digital services, well construction activities, etc.
Given this backdrop, investors could consider buying fundamentally strong energy stocks Graham Corporation (GHM), Schlumberger Limited (SLB), and DNOW Inc. (DNOW). Before diving deeper into the fundamentals of these stocks, let’s understand what’s shaping the energy sector’s prospects.
To combat climate change, nations are actively shifting to renewable energy sources and reducing their dependence on fossil fuels. However, the transition has been slow due to cost overruns and slower adoption.
At the same time, the world’s energy demands have increased rapidly, and the lack of a substantial increase in energy generation from renewables has boosted the demand for oil and gas. OPEC anticipates global oil demand to go up to 2.25 million barrels per day (bpd) and 1.85 million bpd in 2024 and 2025, respectively, sticking to its forecast for solid growth.
According to McKinsey, global natural gas demand is expected to grow between 10% and 15% until 2035 due to its wide range of applications in power generation, heating, petrochemicals, and fertilizers sectors. The oil and gas market size is expected to grow at a CAGR of 5.2% to reach $9.35 trillion by 2028.
The stable demand for oil and gas will likely benefit companies involved in drilling, evaluation, production, and maintenance services. The global oilfield services market is anticipated to grow at a CAGR of 6.5% to reach $175.03 billion by 2031.
Furthermore, driven by rapid technological advancements and a gradual increase in focus on environmental responsibilities, the global energy as a service market is projected to reach $140.50 billion by 2030, exhibiting a CAGR of 9.6%.
Considering these factors, let’s examine the fundamentals of the Energy - Services stock picks, starting with the third in line.
Stock #3: Graham Corporation (GHM)
GHM designs and manufactures fluid, power, heat transfer, and vacuum equipment for chemical and petrochemical processing, defense, space, petroleum refining, cryogenic, energy, and other industries.
On June 3, 2024, GHM announced that it received $17 million in orders for two expansion projects in the energy and petrochemical markets. The company will provide surface condenser systems for a North American customer's net-zero carbon emissions project and a vacuum system for a Middle East crude-to-chemical distillation tower project.
These orders showcase GHM's expertise in providing high-performance equipment for the energy industry.
GHM’s trailing-12-month CAPEX / Sales of 3.65% is 24.3% higher than the industry average of 2.93%. Its trailing-12-month levered FCF margin of 9.21% is 43.2% higher than the industry average of 6.43%. Similarly, its trailing-12-month asset turnover ratio of 0.84x is 7.1% higher than the industry average of 0.79x.
For the fiscal third quarter that ended December 31, 2023, GHM’s net sales and adjusted EBITDA stood at $43.82 million and $3.85 million, up 9.9% and 72.1% year-over-year, respectively. For the same quarter, its adjusted net income and net income per share increased 182.8% and 175% from the year-ago quarter to $2.42 million and $0.22, respectively.
Street expects GHM’s EPS for the quarter ending September 30, 2024, to increase 100% year-over-year to $0.08. Its revenue for the quarter that ended March 31, 2024, is expected to rise 3.4% year-over-year to $44.50 million.
The company surpassed consensus EPS and revenue estimates in each of the trailing four quarters, which is impressive. GHM has gained 143.9% over the past year, closing the last trading session at $27.05.
GHM’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
It has an A grade for Sentiment and a B for Growth. It is ranked #10 out of 50 stocks in the Energy - Services industry. Get GHM’s Value, Momentum, Stability, and Quality ratings here.
Stock #2: Schlumberger Limited (SLB)
SLB provides technology for the energy industry worldwide. The company operates through four divisions: Digital & Integration, Reservoir Performance, Well Construction, and Production Systems.
On May 24, 2024, Equinor awarded SLB’s OneSubsea a contract for Phase 3, Stage 2 of the Troll project in the North Sea. This contract leverages North Sea-compliant configurable equipment and expands their previous agreement, aiming to accelerate gas production using standardized subsea systems.
On May 7, 2024, OKEA awarded SLB’s OneSubsea and Subsea7 an integrated EPCI contract for the Bestla Project in the North Sea. The contract involves developing a subsea tieback to the Brage Platform to enable profitable and sustainable marginal field development.
SLB’s trailing-12-month asset turnover ratio of 0.74x is 48.6% higher than the industry average of 0.50x. Its trailing-12-month Return on Common Equity and Return on Total Assets of 22.35% and 9.06% are 57.8% and 57.5% higher than the industry averages of 14.16% and 5.75%, respectively.
SLB’s revenue for the first quarter that ended March 31, 2024, stood at $8.71 billion, up 12.6% year-over-year. Its adjusted EBITDA grew 15% over the prior-year quarter to $2.06 billion. In addition, its net income attributable to SLB and earnings per share of SLB increased 14.3% and 13.8% from the year-ago quarter to $1.07 billion and $0.74, respectively.
For the quarter ending June 30, 2024, SLB’s revenue and EPS are expected to increase 12.4% and 15.8% year-over-year to $9.10 billion and $0.83, respectively. It surpassed consensus EPS estimates in each of the trailing four quarters. The stock has gained 7.1% over the past year to close the last trading session at $45.89.
SLB’s POWR Ratings reflect this promising outlook. It has an overall rating of B, equating to Buy in our proprietary rating system.
SLB has an A grade for Momentum. It is ranked #9 in the same industry. Click here to see the additional POWR Ratings of SLB for Growth, Value, Stability, Sentiment, and Quality.
Stock #1: DNOW Inc. (DNOW)
DNOW distributes downstream energy and industrial products for petroleum refining, chemical processing, LNG terminals, power generation utilities, and customer on-site locations in the U.S., Canada, and internationally.
On March 12, 2024, DNOW acquired Whitco Supply, LLC. This acquisition boosts DNOW's abilities and presence in key markets, supporting its growth strategy and increasing earnings and free cash flow. It also aligns with DNOW's commitment to enhancing long-term value for shareholders and stakeholders.
DNOW’s trailing-12-month net income margin of 10.30% is 71.9% higher than the industry average of 6%. Likewise, its trailing-12-month Return on Common Equity and Return on Total Capital of 24.31% and 8.83% are 93% and 22.1% higher than the industry averages of 12.59% and 7.23%, respectively.
For the fiscal first quarter that ended March 31, 2024, DNOW’s revenue stood at $563 million. The company’s operating profit amounted to $28 million. Its EBITDA came to $39 million. Furthermore, its non-GAAP net income attributable to DNOW came in at $23 million and $0.21 per share.
Analysts expect DNOW’s EPS for the quarter ending September 30, 2024, to increase 18% year-over-year to $0.30. Its revenue for the quarter ending June 30, 2024, is expected to rise 6.5% year-over-year to $632.50 million. DNOW’s stock has gained 64.1% over the past year to close the last trading session at $14.59.
DNOW’s robust prospects are reflected in its POWR Ratings. It has an overall B rating, equating to Buy in our proprietary rating system.
DNOW has a B grade for Value, Momentum, and Quality. It is ranked #8 in the Energy - Services industry. Beyond what we stated above, we have also rated DNOW for Growth, Stability, and Sentiment. Get all the DNOW ratings here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
SLB shares were trading at $44.36 per share on Monday morning, down $1.53 (-3.33%). Year-to-date, SLB has declined -14.27%, versus a 11.38% rise in the benchmark S&P 500 index during the same period.
About the Author: Neha Panjwani
From her school days, Neha harbored a profound fascination for finance, a passion that steered her toward a career as an investment analyst following the completion of her bachelor's degree in commerce. Currently enrolled in the CFA program, Neha is dedicated to further enriching her comprehension of investment fundamentals. Neha's primary objective is to aid retail investors in discerning optimal investment opportunities by diligently evaluating crucial aspects of financial instruments, with a primary focus on stocks and ETFs. Her commitment lies in empowering individuals to make informed and strategic investment decisions in the dynamic world of finance.
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