The energy landscape shifted once again following the much-anticipated decision by OPEC+ to deepen supply cuts, revealed yesterday. Additionally, the possibility of escalating geopolitical tensions in the Middle East could further exert upward pressure on oil prices.
Given the current scenario, this article examines the fundamentals of three oil and gas stocks: Baker Hughes Company (BKR), MRC Global Inc. (MRC), and Ranger Energy Services, Inc. (RNGR), which appear well-equipped to capitalize on these industry prospects.
The OPEC oil cartel, led by Saudi Arabia and supported by allies, including Russia, took significant measures yesterday to boost declining crude prices. Russia wants higher oil prices to boost the main way it fills its war chest against Ukraine, while Saudi Arabia is seeking higher oil prices to finance an ambitious transformation of its economy.
Saudi Arabia spearheaded the extension of voluntary cuts by deepening its reduction of 1 million barrels per day until March next year. Russia followed suit by slashing 500,000 barrels per day of both crude and refined oil products. Subsequently, Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria, and Oman also implemented smaller reductions in their output.
Furthermore, a noteworthy development in yesterday's OPEC+ meeting was the incorporation of Brazil as a new member. This addition brings one of the world's fastest-growing oil producers into the alliance, potentially strengthening the group's influence over global oil prices in the upcoming year.
In addition to the curtailed supply, there is a looming threat of heightened geopolitical tensions in the Middle East, having the potential to deliver a major shock to the oil market. While Israel and the Palestinian territories do not play major roles in the oil market, the conflict is situated in a crucial oil-producing region.
World Bank cautioned that if the Israel-Hamas conflict were to escalate, the global economy would experience a dual energy shock for the first time in decades, leading to record-high oil prices in the future.
In light of the uncertainties stemming from the conflict and supply constraints in the upcoming months, the Energy Information Administration (EIA) anticipates a rise in the average crude oil price from $90 per barrel in the fourth quarter of 2023 to an average of $93 per barrel in 2024.
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.
Overall, the energy sector is navigating through a complex landscape marked by supply cuts, geopolitical tensions, and rising demand. These converging factors could create a favorable environment for companies operating in this space. With that being said, let’s dig deeper into the featured stocks:
Baker Hughes Company (BKR)
BKR provides a portfolio of technologies and services to energy and industrial value chains worldwide. It operates through two segments: Oilfield Services & Equipment (OFSE) and Industrial & Energy Technology (IET).
On November 17, BKR paid a quarterly dividend of $0.20 per share on its Class A common shares. The company’s annual dividend of $0.80 translates to a 2.40% yield on the prevailing prices, while its four-year average dividend yield is 3.67%. Its dividend payouts have grown at a CAGR of 2.7% over the past three years.
On October 2, BKR revealed that it had been awarded a significant contract, scheduled to be recorded in the third quarter of 2023. This contract involves the provision of a modularized Liquefied Natural Gas (LNG) system and power island.
The agreement stems from a master equipment supply agreement between Venture Global LNG and BKR, targeting over 100 million tons per annum (MTPA) of production capacity.
Additionally, this development builds upon the prior awards granted by Venture Global to BKR, highlighting their ongoing partnership in delivering comprehensive LNG technology solutions. This collaboration has notably contributed to the success of projects like Calcasieu Pass and Plaquemines LNG in Louisiana.
BKR’s trailing-12-month levered FCF margin of 11.27% is 93.9% higher than the 5.81% industry average. Likewise, its trailing-12-month asset turnover ratio of 0.71x is 28.8% higher than the 0.55x industry average. Furthermore, the stock’s trailing-12-month cash per share of $3.18 is 252.1% higher than the $0.90 industry average.
In the fiscal third quarter, which ended on September 30, 2023, BKR’s revenue increased 23.7% year-over-year to $6.64 billion, while its operating income rose 165.4% year-over-year to $714 million.
Furthermore, the company’s adjusted attributable net income and adjusted EPS came in at $427 million and $0.42, representing increases of 61.7% and 61.5% from the prior-year quarter, respectively. Also, its adjusted EBITDA improved 29.7% from the year-ago value to $983 million.
The consensus revenue estimate of $6.94 billion for the fourth quarter (ending December 2023) reflects a 17.6% increase year-over-year. The consensus EPS estimate of $0.48 for the same quarter represents a 26% year-over-year improvement. Moreover, the company surpassed its EPS and revenue estimates in three of the trailing four quarters, which is impressive.
BKR’s shares have soared 21.4% over the past six months to close the last trading session at $33.75.
BKR’s POWR Ratings reflect this robust outlook. The stock has an overall B rating, translating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Growth and a B for Momentum and Sentiment. In the 85-stock Energy - Oil & Gas industry, it is ranked #12. Click here to see BKR’s ratings for Value, Stability, and Quality.
MRC Global Inc. (MRC)
MRC distributes pipes, valves, fittings, and other infrastructure products and services to the gas utility, energy, and industrial end-markets in the United States, Canada, and internationally. In addition, it offers natural gas distribution products and oilfield and industrial supplies.
On September 27, MRC Global (US) Inc., an MRC subsidiary, extended its Enterprise Framework Agreement with Shell plc (SHEL) until the year 2028. Under this global agreement, MRC will continue to serve as a crucial provider of pipe, valves, and fittings, along with on-demand valve actuation services for SHEL across its upstream, midstream, and downstream assets.
Prominent initiatives currently assisted by MRC comprise SHEL’s Holland Hydrogen 1 project, set to become the largest green hydrogen plant in Europe, and the Red II Green project situated in The Netherlands.
MRC’s trailing-12-month Return On Common Equity (ROCE) of 21.79% is 78.2% higher than the 12.23% industry average. Likewise, its trailing-12-month asset turnover ratio of 1.81x is 126.8% higher than the 0.80x industry average.
For the fiscal third quarter, which ended on September 30, 2023, MRC’s sales amounted to $888 million, while its gross profit rose 10.9% from the year-ago value to $183 million.
The company’s net income and EPS came in at $35 million and $0.33, up 45.8% and 57.1% year-over-year, respectively. In addition, its operating income grew 26.7% from the prior-year quarter to $57 million.
Street expects MRC’s revenue for the fiscal period ending December 2023 to increase 3.9% year-over-year to $3.49 billion, while its EPS for the same period is expected to be $0.96. Additionally, the company’s EPS is projected to improve by 15% annually over the next five years.
Over the past six months, MRC’s shares have surged 13% to close the last trading session at $10.34.
MRC’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 Momentum and a B for Value. Within the 49 stocks in the Energy - Services industry, it is ranked #11. Click here to see the other ratings of MRC for Growth, Stability, Sentiment, and Quality.
Ranger Energy Services, Inc. (RNGR)
RNGR provides onshore high specification well service rigs, wireline completion services, and complementary services to exploration and production companies in the United States. It operates through three segments: High Specification Rigs; Wireline Services; and Processing Solutions and Ancillary Services.
On June 26, RNGR was selected to join the broad-market Russell 3000®Index. FTSE Russell uses market-capitalization rankings and style attributes to determine Russell index membership.
Investors widely utilize these indexes for benchmarking and index funds. Inclusion in the U.S. all-cap Russell 3000® Index, lasting a year, also results in automatic entry into the small-cap Russell 2000® Index and relevant growth and value style indexes.
Commenting on this, Stuart Bodden, RNGR’s Chief Executive Officer, said, “As the largest provider of well service rigs in the onshore U.S., this milestone signifies our growth and industry leadership. Joining the index will amplify our visibility, attracting new investors and fueling future growth opportunities.”
The stock’s trailing-12-month levered FCF margin of 6.04% is 3.9% higher than the 5.81% industry average. Also, its trailing-12-month asset turnover ratio of 1.60x is 191.4% higher than the 0.55x industry average. In addition, its trailing-12-month Return On Total Assets (ROTA) of 7.45% is 1.2% higher than the 7.36% industry average.
For the fiscal third quarter, which ended on September 30, 2023, RNGR’s total revenue amounted to $164.40 million, while its net income came in at $9.40 million and $0.38 per share, respectively.
During the same period, the company’s cash and cash equivalents stood at $8.20 million, up 121.6% compared to $3.70 million as of December 31, 2022. Also, its adjusted EBITDA came in at $24 million.
Analysts expect RNGR’s revenue and EPS for the fiscal period ending December 2023 to increase 4.8% and 36.1% year-over-year to $637.65 million and $1.32, respectively. Furthermore, the company’s EPS is expected to improve by 8% per annum over the next five years.
The stock lost marginally intraday to close the last trading session at $9.75.
It’s no surprise that RNGR has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Value and a B for Momentum. Out of 49 stocks in the Energy - Services industry, it is ranked #8.
In addition to the POWR Ratings we’ve stated above, we also have RNGR’s ratings for Growth, Stability, Sentiment, and Quality. Get all RNGR ratings here.
What To Do Next?
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BKR shares were trading at $34.14 per share on Friday afternoon, up $0.39 (+1.16%). Year-to-date, BKR has gained 18.44%, versus a 21.29% 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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