Amid the rising momentum toward sustainable energy, the traditional energy sector continues to offer compelling prospects for investors. Additionally, the ongoing OPEC supply cuts, coupled with geopolitical factors like the Israel-Hamas conflict, may intensify the constraints on oil supply.
In such a scenario, three fundamentally sound stocks, Shell plc (SHEL), Enterprise Products Partners L.P. (EPD), and GeoPark Limited (GPRK) could be wise additions to your portfolio. Let us understand in detail.
The current conflict between Hamas and Israel is considered one of the most significant geopolitical risks to oil markets since Russia's invasion of Ukraine last year. While there hasn't been a direct impact on oil flows yet, analysts and market observers highlight two potential implications if the situation escalates.
Firstly, if Iran is implicated in an attack by Hamas on Israel, there is a possibility that the United States could tighten or intensify the enforcement of sanctions on Iran. This could further strain an already undersupplied oil market.
Secondly, the ongoing efforts by Washington to broker a deal normalizing relations between Saudi Arabia and Israel, potentially leading to an increase in the kingdom's oil output, could face disruption.
The World Bank cautioned that a significant escalation of the conflict between Israel and Hamas, potentially expanding into a broader conflict in the Middle East, has the potential to cause a surge in oil prices of up to 75%.
Additionally, the International Energy Agency (IEA) has increased its projection for oil demand growth in 2023 to 2.4 million barrels per day (bpd). Also, it has revised its growth forecast for 2024 to 930,000 bpd, an increase from the earlier projection of 880,000 bpd.
The oil prices are further affected by supply cuts by major oil-producing nations. Saudi Arabia, Russia, and other OPEC+ members have committed to a collective reduction in oil output totaling approximately 5 million bpd, equivalent to about 5% of the daily global demand.
Furthermore, as OPEC+ is scheduled to discuss the possibility of implementing further cuts when the group convenes later this week, a majority of 18 analysts surveyed predict that OPEC+ is inclined to prolong or potentially intensify oil supply cuts into the following year.
Despite the ever-evolving dynamics of the energy sector, the convergence of geopolitical elements and the escalating supply cuts by OPEC+ are likely to sustain elevated oil prices and robust demand. Thus, investors could consider buying SHEL, EPD, and GPRK for potential gains. To that end, let us dive deeper into the fundamentals of these oil and gas stocks in detail:
Shell plc (SHEL)
Headquartered in London, the United Kingdom, SHEL operates as an energy and petrochemical company. The company operates through Integrated Gas; Upstream; Marketing; Chemicals and Products; and Renewables and Energy Solutions segments. In addition, it explores for and extracts crude oil, natural gas, and natural gas liquids.
On November 2, SHEL declared an interim dividend of $0.33 per share payable to its shareholders on December 20, 2023. The company’s annual dividend of $2.65 translates to a 3.97% yield on the prevailing prices, while its four-year average dividend yield is 2.75%.
On October 23, Shell Gas BV, a subsidiary of SHEL, along with its partners in the Oman LNG LLC venture, entered into a revised shareholder’s agreement for Oman LNG.
This amended agreement extends the business's operations beyond the year 2024. As per these arrangements, Shell Gas will retain its position as the primary private shareholder in Oman LNG, holding a 30% stake, and will continue to serve as the technical adviser.
SHEL’s trailing-12-month levered FCF margin 9.63% is 65.7% higher than the 5.81% industry average. Its trailing-12-month cash per share of $6.47 is 598.5% higher than the industry average of $0.93. Furthermore, the stock’s trailing-12-month asset turnover ratio of 0.80x is 45.7% higher than the industry average of 0.55x.
In the fiscal third quarter that ended September 30, 2023, SHEL’s total revenue and other income amounted to $78.01 billion. The company’s income attributable to SHEL shareholders increased 4.5% year-over-year to $7.04 billion, while EPS stood at $1.05, up 14.1% from the prior-year quarter. In addition, its total comprehensive income rose 61.8% from the year-ago value to $5.91 billion.
Analysts expect SHEL’s revenue to increase marginally year-over-year to $342.04 billion for the fiscal year ending December 2024. While its EPS is expected to grow 5.9% year-over-year to $8.61 for the same period. Moreover, the company surpassed its revenue estimates in three of the trailing four quarters, which is promising.
Over the past year, SHEL’s shares have surged 21.6% to close the last trading session at $66.52.
SHEL’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 grade for Momentum and Quality. In the 85-stock Energy - Oil & Gas industry, it is ranked #14. Click here to see SHEL’s ratings for Growth, Value, Stability, and Sentiment.
Enterprise Products Partners L.P. (EPD)
EPD provides midstream energy services to producers and consumers of natural gas, Natural Gas Liquids (NGLs), crude oil, petrochemicals, and refined products. The company operates through four segments: NGL Pipelines & Services; Crude Oil Pipelines & Services; Natural Gas Pipelines & Services; and Petrochemical & Refined Products Services.
On October 31, EPD paid a dividend of $0.50 per share to its shareholders. This dividend signifies a 5.3% rise compared to the dividend announced for the third quarter of 2022. In addition, this year marks the company’s 25th consecutive year of experiencing growth in dividends.
The company’s annual dividend of $2 translates to a 7.62% yield on the prevailing prices, while its four-year average dividend yield is 8.04%. Its dividend has grown at CAGRs of 3.6% and 2.9% over the past three and five years, respectively.
On July 18, EPD announced the commencement of operations at its Poseidon cryogenic natural gas processing facility in Glasscock County, Texas. Serving as the company's sixth plant in the Midland Basin, Poseidon boasts a nameplate capacity of 300 million cubic feet per day. It has the capability to extract over 40,000 barrels per day of natural gas liquids.
In terms of the trailing-12-month levered FCF margin, EPD’s 6.36% is 9.4% higher than the 5.81% industry average. Its trailing-12-month Return On Common Equity (ROCE) of 19.94% is 3.2% higher than the industry average of 19.32%. Furthermore, the stock’s trailing-12-month asset turnover ratio of 0.71x is 28.8% higher than the industry average of 0.55x.
For the third quarter which ended on September 30, 2023, EPD’s revenues came in at $12 billion, while its adjusted EBITDA rose 3.1% over the prior-year quarter to $2.33 billion. In addition, during the same period, its net income and EPS came in at $1.35 billion and $0.60, respectively.
Moreover, the company’s adjusted cash flow from operations (CFFO) increased 3.6% year-over-year to $2.02 billion. Its total gross operating margin rose marginally year-over-year to $2.33 billion.
Analysts expect EPD’s EPS for the fourth quarter ending December 2023 to increase 6.7% year-over-year to $0.69. Its revenue for the same quarter is expected to be $11.96 billion.
The stock has gained 10.1% year-to-date to close the last trading session at $26.55.
EPD’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 a B grade for Value, Momentum, and Stability. Within the A-rated MLPs - Oil & Gas industry, it is ranked #5 out of 26. Click here to see the other ratings of EPD for Growth, Sentiment, and Quality.
GeoPark Limited (GPRK)
GPRK engages in the exploration, development, and production of oil and gas reserves in Chile, Colombia, Brazil, Argentina, and Ecuador. GPRK has a strategic partnership with ONGC Videsh to jointly acquire, invest in, and create value from upstream oil and gas projects across Latin America.
On November 8, GPRK declared a quarterly dividend of $0.13 per share payable to its shareholders on December 11, 2023. The company’s annual dividend of $0.54 translates to a 5.62% yield on the prevailing prices, while its four-year average dividend yield is 1.85%.
In terms of the trailing-12-month levered FCF margin, GPRK’s 16.90% is 190.8% higher than the 5.81% industry average. Its trailing-12-month ROCE of 114.17% is 490.8% higher than the industry average of 19.32%. Furthermore, the stock’s trailing-12-month asset turnover ratio of 0.84x is 53.6% higher than the industry average of 0.55x.
For the fiscal third quarter, which ended on September 30, 2023, GPRK’s total revenue came in at $192.10 million, While the company’s operating profit and profit for the period amounted to $80.50 million and $24.80 million, respectively.
Moreover, during the same period, GPRK’s total current liabilities amounted to $191.20 million, declining 16.1% compared to $229.20 million as of December 31, 2022.
Street expects GPRK’s revenue and EPS for the fiscal period ending 2024 to increase 15.2% and 41.5% year-over-year to $889.39 million and $3.47, respectively. Additionally, the company surpassed its EPS estimates in each of the trailing four quarters, which is excellent.
The stock gained marginally intraday to close the last trading session at $9.55.
It’s no surprise that GPRK has an overall rating of B, which equates to Buy in our proprietary rating system. It has a B grade for Value, Sentiment, and Quality. Out of 44 stocks in the A-rated Foreign Oil & Gas industry, it is ranked #8.
In addition to the POWR Ratings we’ve stated above, we also have GPRK’s ratings for Growth, Momentum, and Stability. Get all GPRK ratings here.
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SHEL shares were trading at $64.77 per share on Wednesday morning, down $1.75 (-2.63%). Year-to-date, SHEL has gained 18.31%, versus a 20.35% 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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