The energy industry is poised for solid growth due to the favorable supply-demand implication for oil and gas prices and rising demand for energy worldwide. Despite the transition to cleaner sources of energy, analysts foresee substantial demand for oil and gas in the long term.
Given this backdrop, it could be wise to consider investing in fundamentally strong energy stocks, Valero Energy Corporation (VLO), ChampionX Corporation (CHX), and Ultrapar Participações S.A. (UGP).
Before diving deeper into the fundamentals of these stocks, let’s first understand what’s shaping the energy industry’s prospects.
Energy companies experienced record profits last year amid supply concerns, driven by an embargo on Russian gas and oil due to its war against Ukraine. Although oil and gas prices stabilized toward the later part of last year, they surged above $90 a barrel in September, only to fall to a six-month low after that amid concerns over tepid demand.
However, oil prices have been rising again after the Houthi attacks on ships in the Red Sea. Fears of shipping disruptions, the ongoing violence in Gaza, and tensions spreading in the Middle East are boosting the prices of crude oil. Meanwhile, the OPEC+ is aiming to boost oil prices by announcing a production cut of an additional 900,000 barrels of crude oil.
However, U.S. crude oil production reached a record 13.236 million barrels per day (bpd) in September. The U.S. has been producing oil like it has never before. It is expected to have set a new production record for oil on December 15. Similarly, the U.S. is also likely to set a new natural gas production record this year.
Although the near-term demand outlook for oil appears weak amid a sluggish Chinese economy, the Fed’s rate cuts next year could boost economic growth and positively affect oil demand.
The IEA raised its 2023 oil demand growth forecast to 2.4 million bpd and increased the 2024 forecast to 930,000 bpd. Similarly, OPEC raised its 2023 global oil demand growth projection to 2.46 million bpd, anticipating a 2.25 million bpd increase in 2024.
The EIA projects a surge in U.S. power generation from renewables, increasing from 21% in 2021 to 44% in 2050. Despite the growth of renewables, oil is expected to remain the primary energy source, with JP Morgan projecting global demand to reach 106.9 mbd by 2030, a 5.5 mbd increase from 2023, indicating a positive long-term outlook despite the short-term challenges.
Given the continued dependence on oil, energy companies providing services in oil and gas drilling, evaluation, production, 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 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.
In terms of the trailing-12-month Return on Common Equity, VLO’s 44.73% is 123.7% higher than the 19.99% industry average. Likewise, its 24.68% trailing-12-month Return on Total Capital is 165.4% higher than the industry average of 9.30%. Additionally, the stock’s 2.37x trailing-12-month asset turnover ratio is 331.8% higher than the industry average of 0.55x.
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 earnings per common 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 8% year-over-year to $37.28 billion. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 20.7% to close the last trading session at $133.19.
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 #5 out of 84 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.
ChampionX Corporation (CHX)
CHX provides chemistry solutions and engineered equipment and technologies to oil and gas companies worldwide. The company operates through four segments: Production Chemical Technologies, Production & Automation Technologies, Drilling Technologies, and Reservoir Chemical Technologies.
On November 10, 2023, CHX declared a regular quarterly dividend of $0.085 per share on its common stock, payable on January 26, 2024, to shareholders of record as of January 5, 2024.
In terms of the trailing-12-month levered FCF margin, CHX’s 13.05% is 122.6% higher than the 5.86% industry average. Likewise, its 12.92% trailing-12-month Return on Total Capital is 38.9% higher than the industry average of 9.30%. Additionally, the stock’s 9.21% trailing-12-month Return on Total Assets is 22.9% higher than the industry average of 7.49%.
For the fiscal third quarter that ended September 30, 2023, CHX’s revenues came in at $939.78 million. Its gross profit increased 48.5% over the prior-year quarter to $291.86 million.
The company’s adjusted net income attributable to CHX and adjusted earnings per share rose 19.3% and 24.2% year-over-year to $80.95 million and $0.41, respectively. Additionally, its adjusted EBITDA stood at $189.54 million, up 14.1% year-over-year.
For the quarter ending December 31, 2023, CHX’s EPS is expected to increase 4% year-over-year to $0.45. Its revenue for the quarter ending June 30, 2024, is expected to increase 4.5% year-over-year to $968.67 million. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past nine months, the stock has gained 20.4% to close the last trading session at $30.70.
CHX’s POWR Ratings reflect this positive outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
Within the Energy – Services industry, it is ranked #6 out of 49 stocks. It has a B grade for Momentum and Quality. To see the other ratings of CHX for Growth, Value, Stability, and Sentiment, click here.
Ultrapar Participações S.A. (UGP)
Headquartered in São Paulo, Brazil, UGP operates in the energy and infrastructure business internationally. The company distributes liquefied petroleum gas to residential, commercial, and industrial consumers, as well as renewable electricity and compressed natural gas.
In terms of the trailing-12-month asset turnover ratio, UGP’s 3.65x is 563.5% higher than the 0.55x industry average.
UGP’s net revenues from sales and services for the third quarter ended September 30, 2023, stood at R$32.48 billion ($6.68 billion). Its gross profit increased 80.9% year-over-year to R$2.86 billion ($587.81 million). Its adjusted EBITDA rose 138.7% year-over-year to R$2 billion ($411.06 million).
Also, the company’s net income attributable to shareholders of UGP and earnings per share came in at R$864.90 million ($177.76 million) and R$0.79, representing a significant increase over the prior-year quarter, respectively.
Analysts expect UGP’s revenue for the quarter ending June 30, 2024, to increase 6.4% year-over-year to $6.42 billion. Its EPS for the fiscal year ending December 31, 2023, is expected to increase 167.4% year-over-year to $0.22. The stock has gained 126.5% year-to-date to close the last trading session at $5.48.
UGP’s POWR Ratings reflect its solid prospects. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
It has an A grade for Sentiment and a B for Value. Within the B-rated Foreign Oil & Gas industry, it is ranked #2 out of 43 stocks. To access UGP’s additional grades for Growth, Momentum, Stability, and Quality, click here.
What To Do Next?
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VLO shares were trading at $132.21 per share on Wednesday morning, down $0.98 (-0.74%). Year-to-date, VLO has gained 7.66%, versus a 26.31% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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