Despite the growing popularity of renewable energy, the demand for oil and gas is not expected to decline anytime soon. In fact, oil and gas demand is forecasted to grow. Increased drilling activities, anticipation of interest rate cuts, a recovering Chinese economy, and geopolitical tensions are likely to drive the growth of the energy sector this year.
Amid this backdrop, investors could consider buying fundamentally strong energy stocks such as Star Group, L.P. (SGU), Geospace Technologies Corporation (GEOS), and Gulf Island Fabrication, Inc. (GIFI), currently trading under $15. Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the energy industry’s prospects.
In its Short-Term Energy Outlook (STEO) report, the U.S. Energy Information Administration (EIA) said that it expects Brent crude oil to average around $90 per barrel in the second quarter this year, a $2/b increase from last month’s report. In addition, they expect Brent crude oil prices to hover around $89/b in 2024.
Ongoing tensions in the Middle East have raised concerns over the supply of crude oil and natural gas, as the region produces a significant percentage of the world’s total oil and gas output. The World Bank believes that any escalation of tensions in the Middle East would push the oil prices above $100.
The Energy Information Association (EIA) lifted global oil consumption forecasts for this year by 0.5% to 102.91 million bpd and by 0.4% to 104.26 million bpd for 2025. OPEC forecasts that world oil demand will increase by 2.25 mb/d in 2024 and 1.85 mb/d in 2025.
Given the energy sector’s promising prospects, the demand for energy services looks promising. Energy services involve providing advanced technology, analytics, and personalized services to the energy industry participants. The global energy as a service market is estimated to reach $208.20 million by 2032, growing at an 11.8% CAGR.
Meanwhile, several technological advancements in drilling, like horizontal drilling and hydraulic fracturing, have bolstered drilling activities and helped in the efficient and cost-effective extraction of oil and gas. The global drilling services market is expected to reach $17.44 billion by 2027, growing at a CAGR of 8.6%.
Considering these factors, let’s examine the fundamentals of the three energy sector stocks mentioned above.
Star Group, L.P. (SGU)
SGU provides home heating oil and propane products and services to residential and commercial customers in the U.S. It offers gasoline and diesel fuel and installs, maintains, and repairs heating and air conditioning equipment.
SGU’s trailing-12-month Return on Common Equity of 10.57% is 19% higher than the industry average of 8.89%. Its trailing-12-month Return on Total Capital and Return on Total Assets of 5.71% and 3.29% are 46.2% and 38.2% higher than the industry averages of 3.91% and 2.38%, respectively.
SGU’s total sales and operating income for the fiscal first quarter that ended December 31, 2023, stood at $528.10 million and $21.62 million, respectively. In addition, its adjusted EBITDA stood at $49.04 million. For the same quarter, its net income and EPS stood at $12.98 million and $0.36, respectively.
The stock has gained 9.9% over the past month to close the last trading session at $11.10.
SGU’s strong fundamentals are reflected in its POWR Ratings. It has an overall A rating, equating to a Strong 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 Quality and a B for Value, Momentum, and Sentiment. It is ranked #3 out of 24 stocks in the A-rated MLPs - Oil & Gas industry. Click here to see the additional POWR Ratings for SGU (Growth and Stability).
Geospace Technologies Corporation (GEOS)
GEOS designs and manufactures instruments and equipment used in the oil and gas industry to acquire seismic data in order to locate, characterize, and monitor hydrocarbon-producing reservoirs. The company operates through three segments: Oil and Gas Markets, Adjacent Markets, and Emerging Markets.
On April 18, GEOS announced the product release of an all-in-one, ultralight weight, land-based, wireless seismic data acquisition solution known as Pioneer, which weighs less than 0.5kg, featuring a 5Hz geophone, specially designed by GEOS with a small form factor and reduced weight.
The product aims to reduce overall operating and ownership costs by lowering the deployment footprint and its benefits of lower power consumption, smaller size, and less weight resulting in reduced logistics and lower fuel costs, enabling crews to deploy much faster with greater efficiency.
On January 3, GEOS announced a $30 million contract with an international marine geophysical services provider to purchase the company’s latest shallow-water ocean bottom node, Mariner. Mariner is a shallow-water seabed seismic data acquisition node designed with inductive charging and data download, making it a connector-free device.
GEOS’ trailing-12-month net income margin and levered FCF margin of 17.42% and 7% are 36.2% and 4.7% higher than the industry averages of 12.79% and 6.69%, respectively.
For the fiscal first quarter that ended December 31, 2023, GEOS’ total revenue and gross profit increased 60.8% and 111.1% year-over-year to $50.03 million and $22.24 million, respectively. For the same quarter, its net income and income per common share stood at $12.68 million and $0.94, compared to net loss and loss per common share of $97 thousand and $0.01 in the year-ago quarter, respectively.
The stock has gained 70.1% over the past year to close the last trading session at $12.64.
GEOS’ POWR Ratings reflect its positive prospects. It has an overall A rating, equating to a Strong Buy in our proprietary rating system.
GEOS has an A grade for Growth and a B for Value, Momentum, and Quality. Within the Energy - Services industry, it is ranked #3 out of 50 stocks. To see the additional POWR Ratings of GEOS for Stability and Sentiment, click here.
Gulf Island Fabrication, Inc. (GIFI)
GIFI operates as a fabricator of steel structures and modules in the U.S. It operates through Services, Fabrication, and Shipyard divisions.
GIFI’s trailing-12-month asset turnover ratio of 1.15x is 120.5% higher than the industry average of 0.52x.
GIFI’s adjusted revenue and gross profit for the fiscal fourth quarter that ended December 31, 2023, increased 16.4% and 77.3% year-over-year to $43.99 million and $8.37 million, respectively. In addition, its adjusted EBITDA stood at $6.61 million, up 188.1% from the prior-year quarter.
For the same quarter, its net income increased considerably from the year-ago quarter to $7.09 million, and income per share stood at $0.43, up 975% from the prior-year quarter.
Street expects GIFI’s EPS for the quarter that ended March 31, 2024, to increase 100% year-over-year to $0.08. The stock has gained 106% over the past nine months to close the last trading session at $6.84.
GIFI’s POWR Ratings reflect this promising outlook. It has an overall rating of B, equating to Buy in our proprietary rating system.
GIFI has an A grade for Growth and Sentiment and a B for Momentum. Within the Energy - Drilling industry, it is ranked first out of 15 stocks. To see GIFI’s Value, Stability, and Quality ratings, click here.
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SGU shares were trading at $11.10 per share on Monday morning, down $0.19 (-1.68%). Year-to-date, SGU has declined -0.84%, versus a 7.61% 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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