Despite the growing interest in renewable energy, traditional energy sources such as oil and gas have been gaining traction recently owing to factors like surging demand, supply constraints, and geopolitical uncertainties. These converging factors are providing favorable opportunities for companies within this industry.
Given the promising backdrop, three fundamentally sound energy stocks, Energy Transfer LP (ET), CVR Energy, Inc. (CVI), and North European Oil Royalty Trust (NRT), could be wise additions to your watchlist this month, as they seem well-positioned to capitalize on the industry tailwinds.
Before delving into the fundamentals of featured stocks, let us take a look at a few factors that have been driving the industry’s prospects.
According to a report from Deloitte, oil prices are expected to rise as the summer driving season commences. The surge in travel and transportation during the summer months is projected to fuel oil demand, contributing to the anticipated price increase.
Additionally, Joseph McMonigle, the Secretary General of the International Energy Forum (IEF), attributes the surge in oil prices in the latter half of the year to the increasing demand from emerging economies, notably China and India. These two countries are expected to contribute a total of 2 million barrels per day to the rise in oil demand.
Moreover, the demand is expected to be further bolstered as Saudi Arabia, a major oil producer, decided to extend its voluntary crude output cut of 1 million barrels per day into September. This extension marks the third consecutive month of such production declines.
Furthermore, as demand continues to outpace supply, mainly due to significant production cuts implemented by OPEC leader Saudi Arabia, oil inventories are showing signs of decline in certain regions.
According to JP Morgan analysts, oil inventories now play a more substantial role in determining oil prices compared to the influence of the U.S. dollar. This shift is attributed to the accelerated oil trading in other currencies resulting from Western sanctions on Russia.
Moreover, Goldman Sachs forecasted solid demand creating a larger-than-expected 1.8 million barrels per day deficit in the second half this year and a 0.6 million barrels per day deficit in 2024. Goldman analysts also projected a 12-month Brent price of $93 per barrel.
Given the industry dynamics, keeping a close eye on ET, CVI, and NRT could be beneficial. Let us dig deeper into the fundamentals of these stocks in detail:
Energy Transfer LP (ET)
ET provides energy-related services and owns and operates one of the largest and most diversified portfolios of energy assets in the United States, with approximately 120,000 miles of pipeline and associated energy infrastructure.
On July 25, ET declared a quarterly distribution of $0.31 per energy transfer common unit, payable to its unitholders on August 21, 2023. The company’s annual dividend of $1.24 translates to a 9.44% yield on the prevailing prices, while its four-year average dividend yield is 10.35%.
ET’s trailing-12-month cash from operations of $10.03 billion is significantly higher than the $634.20 million industry average. Its trailing-12-month asset turnover ratio of 0.83x is 28% higher than the 0.65x industry average.
For the fiscal second quarter, which ended June 30, 2023, ET’s revenues amounted to $18.32 billion, while its operating income came in at $1.84 billion. In the same period, the company’s net income and EPS stood at $1.23 billion and $0.25, respectively. Also, its adjusted EBITDA came in at $3.12 billion.
Analysts expect ET’s revenue for the third quarter (ending September 30, 2023) to be $21.45 billion. While its EPS for the same quarter is projected to increase 12.6% year-over-year to $0.33.
ET’s revenue and net income have grown at CAGRs of 18.8% and 46.6% over the past three years, respectively. Likewise, its EPS and levered FCF have improved at CAGRs of 34.3% and 99.5% over the same period, respectively.
Over the past year, the stock has gained 14.1% to close the last trading session at $12.84
ET’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B for Value and Momentum. In the 89-stock Energy - Oil & Gas industry, it is ranked #9. Click here to see ET’s ratings for Growth, Stability, Sentiment, and Quality.
CVR Energy, Inc. (CVI)
CVI engages in petroleum refining and nitrogen fertilizer manufacturing activities in the United States. The company operates in two segments: Petroleum and Nitrogen Fertilizer.
On July 31, CVI declared a quarterly and special dividend of 50 cents per and $1 per share, respectively, payable to its shareholders on August 21, 2023. The company’s annual dividend translates to a 5.44% yield on the prevailing prices, while its four-year average dividend yield is 12.28%.
The stock’s trailing-12-month ROCE and ROTC of 69.55% and 21.36% are 222.8% and 104% higher than the 10.47% and 8.28% industry averages, respectively. Also, its trailing-12-month asset turnover ratio of 2.23x is 255.3% higher than the 0.63x industry average.
In the second quarter that ended June 30, 2023, CVI’s net sales amounted to $2.24 billion, while its operating income stood at $224 million. During the same period, the company’s net income and EPS amounted to $168 million and $1.29, respectively. Also, its cash and cash equivalents came in at $751 million, up 47.3% compared to $510 million as of December 31, 2022.
Street expects CVI’s revenue and EPS for the third quarter (ending September 30, 2023) to be $2.28 billion and $1.42, respectively. Moreover, the company surpassed the EPS and revenue estimates in three of the trailing four quarters, which is promising.
Additionally, CVI’s revenue and EBIT have grown at CAGRs of 25.6% and 99.5% over the past three years, respectively. Likewise, its levered FCF and net income have increased at CAGRs of 239.5% and 95.4% over the same period, respectively.
The stock has gained 23.7% over the past month to close the last trading session at $36.70.
CVI’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has an A grade for Quality and a B for Momentum. Within the same industry, it is ranked #18. Click here to see CVI’s ratings for Growth, Value, Stability, and Sentiment.
North European Oil Royalty Trust (NRT)
NRT is a grantor trust which holds overriding royalty rights covering gas and oil production in various concessions or leases in the Federal Republic of Germany. It holds royalties for the sale of gas well gas, oil well gas, crude oil, condensate, and sulfur.
On July 31, NRT declared a quarterly distribution of $0.21 per unit, payable to its unitholders on August 30, 2023. NRT’s annual dividend of $0.84 translates to a 6.95% yield on the prevailing prices, while its four-year average dividend yield is 11.4%. Its dividend payouts have grown at CAGRs of 78.7% and 33% over the past three and five years, respectively.
NRT’s trailing-12-month levered FCF margin of 80.6% is significantly higher than the 6.40% industry average. Its trailing-12-month ROCE, ROTC, and ROTA of 7,222.42%, 4,514.01%, and 295.02% are significantly higher than the industry averages of 22.52%, 10.60%, and 8.43%, respectively.
During the fiscal second quarter that ended April 30, 2023, NRT’s total royalty income stood at $9.76 million, up 158.6% year-over-year, while its net income and net income per unit grew 167% and 164.1% from the prior-year quarter to $9.50 million and $1.03, respectively.
Over the past three years, its revenue and EBIT have grown at CAGRs of 71.9% and 78.3%, respectively. While its levered FCF and net income have increased at CAGRs of 121% and 78.3% over the same period, respectively.
NRT’s shares gained marginally intraday to close the last trading session at $12.64
It’s no surprise that NRT has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Quality and a B for Growth and Momentum. Out of 89 stocks in the same industry, it is ranked #4.
In addition to the POWR Ratings we stated above, we also have NRT’s ratings for Value, Stability, and Sentiment. Get all NRT ratings here.
What To Do Next?
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ET shares were trading at $12.81 per share on Friday afternoon, down $0.03 (-0.23%). Year-to-date, ET has gained 13.22%, versus a 19.29% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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