Despite the lingering market concerns over economic and oil demand growth, particularly in China, crude oil prices are projected to hike steadily through 2024. Also, the ongoing withdrawals from oil inventories predict a positive oil and gas market outlook.
Given the industry tailwinds, it could be wise to invest in fundamentally sound undervalued energy stocks Energy Transfer LP (ET), Plains All American Pipeline, L.P. (PAA), and Delek Logistics Partners, LP (DKL) for potential gains.
In its recent publication of World Oil Outlook for 2024, the Organization of Petroleum Exporting Countries (OPEC) appeared highly bullish on oil demand growth. The oil producer group forecasted strong energy demand growth of 24% globally between 2024 and 2050. It also expects robust growth in oil demand, projected to reach 112.3 million barrels per day by 2029, up 10.1 million b/pd from 2023.
IEA reported global oil demand gains of 800 kb/d for the first half of 2024 and projected average annual increases of 900 kb/d in 2024. Further, owing to outages caused by a political dispute in Libya and higher flows from Guyana and Brazil, world supply rose by 80 kb/d to 103.5 mb/d during August; also, annual gains are likely to grow 660 kb/d in 2024 and 2.1 mb/d in 2025.
Further, ongoing withdrawals from global oil inventories are likely to push crude oil prices above $80/b in the upcoming sessions. Also, withdrawals from oil inventories will spike further in the fourth quarter due to delayed OPEC+ production increases. EIA projects the Brent crude oil spot price to average $82/b in the fourth quarter and average $84/b in 2025.
The oil and gas market is anticipated to exhibit growth at a CAGR of 5.2%, resulting in a market value of $9.35 billion by 2028 driven by supportive government initiatives, growing resource exploration activities, and shift towards digital technologies.
Given the industry’s robust outlook, investing in fundamentally strong energy stocks ET, PAA, and DKL could be wise.
Let’s discuss the fundamentals of these stocks in detail:
Energy Transfer LP (ET)
ET is a provider of energy-related services. The company owns and operates natural gas transportation pipeline, natural gas storage facilities in Texas and Oklahoma, and nearly 20,090 miles of interstate natural gas pipeline. ET also sells natural gas to electric utilities, independent power plants, local distribution and other marketing companies, and industrial end-users.
In terms of forward Price/Sales, ET is trading at 0.63x, 55.8% lower than the industry average of 1.42x. Likewise, the stock’s forward Price/Cash Flow multiple of 4.11 is 22.7% lower than the industry average of 5.31. Also, its forward EV/Sales of 1.46x is 24.1% lower than the industry average of 1.93x.
On July 16, ET and Sunoco LP (SUN) entered a joint venture to combine their crude oil and produced water-gathering assets in the Permian Basin. ET will hold a 67.5% interest in the joint venture, with Sunoco holding a 32.5% interest. ET will oversee over 5,000 miles of pipelines and 11 million barrels of storage capacity.
Also, on July 15, ET completed the acquisition of WTG Midstream Holdings LLC. Total consideration for the transaction was $2,275 million in cash and about 50.8 million newly issued ET common units. The strategic acquisition expanded the Permian Basin pipeline and processing network, providing further access to growing natural gas and NGLs supplies.
During the second quarter that ended June 30, 2024, ET’s revenues rose 13.1% year-over-year to $20.73 billion. Its operating income grew 25.2% from the year-ago value to $2.30 billion. The company’s net income came in at $1.99 billion and $0.35 per common unit, up 61.6% and 40% from the prior year’s quarter, respectively.
Also, the company’s adjusted EBITDA increased 20.4% year-over-year to $3.76 billion. And its distributable cash flow grew 26% from the year-ago value to $2.57 billion.
Street expects ET’s EPS for the third quarter (ending September 2024) to increase 128.8% year-over-year to $0.34, and its revenue for the same quarter is expected to grow 5.2% year-over-year to $21.82 billion. For the fiscal year 2024, the company’s revenue and EPS are expected to improve 11.6% and 30.9% year-over-year to $87.72 billion and $1.43, respectively.
ET’s stock has gained 3.4% over the past six months and 15.2% over the past year to close the last trading session at $16.07.
ET’s solid fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
ET has an A grade for Growth. It also has a B grade for Value, Momentum, and Stability. It is ranked #3 out of 80 stocks in the Energy – Oil & Gas industry.
In addition to the POWR Ratings we’ve stated above, we also have ET ratings for Sentiment and Quality. Get all ET ratings here.
Plains All American Pipeline, L.P. (PAA)
PAA engages in the pipeline transportation, terminaling, storage, and gathering crude oil and natural gas liquids (NGL) in the United States and Canada. The company operates through two segments: Crude Oil and NGL.
PAA’s forward EV/Sales of 0.49x is 74.3% lower than the industry average of 1.93x. Similarly, the stock’s forward Price/Sales of 0.24x is 83.3% lower than the 1.42x industry average. Further, its forward Price/Book multiple of 1.52 is lower than the industry average of 1.59.
On July 3, PAA and Plains GP Holdings (PAGP) announced their quarterly distributions for the second quarter of 2024 in the following manner: PAA Common Units – $0.3175 per unit, PAGP class A shares – $0.3175 per class A share, PAA series A preferred units – $0.61524 per series A preferred unit, and PAA series B preferred units - $24.77 per series B preferred unit.
PAA pays an annual distribution of $1.27, which translates to a yield of 7.26% at the current share price. Its four-year average dividend yield is 7.49%. Moreover, the company’s dividend payouts have increased at a CAGR of 19.2% over the past three years.
During the second quarter that ended June 30, 2024, PAA’s revenues increased 11.5% year-over-year to $12.93 billion. Adjusted net income attributable to PAA amounted to $288 million and $0.31 per common unit, reflecting 18.5% and 24% growth from the prior year’s quarter, respectively.
Furthermore, the company’s adjusted EBITDA rose 15.3% year-over-year to $807 million.
The company has also raised its guidance for full-year 2024 adjusted EBITDA to a new range of $2.72 - $2.77 billion. PAA reaffirmed its adjusted free cash flow guidance of $1.55 billion.
Street expects PAA’s revenue for the third quarter (ending September 2024) to increase 8.2% year-over-year to $13.06 billion. Its revenue for the fiscal year 2024 is expected to grow 6.2% year-over-year to $51.71 billion. Furthermore, the company surpassed the consensus EPS estimates in three of the trailing four quarters.
PAA’s stock has surged 1% over the past six months and 14.5% over the past year to close the last trading session at $17.49.
PAA’s bright prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
The stock has an A grade for Growth and a B grade for Value, Stability, and Momentum. PAA is ranked #8 among 23 stocks in the A-rated MLPs – Oil & Gas industry.
Click here to access PAA’s ratings for Quality and Sentiment.
Delek Logistics Partners, LP (DKL)
DKL provides gathering, pipeline, transportation, and other services for crude oil, intermediates, refined products, natural gas, storage, wholesale marketing, terminalling water disposal, and recycling customers. The company operates through Gathering and Processing segment; Wholesale Marketing and Terminalling segment; and Storage and Transportation segment.
On September 12, DKL acquired H2O Midstream, a portfolio company of EIV Capital, LLC, for a total consideration of $230 million, consisting of $160 million in cash and $70 million of convertible preferred redeemable equity.
The H2O Midstream operations significantly align with DKL's operations, and the acquisition supports DKL’s core strategy of offering a full midstream service solution to existing and third-party customers in the prolific Permian Basin. Also, it presents an opportunity to extract significant synergies through cost optimization and cross-product sales.
On July 30, DKL declared its quarterly cash distribution for the second quarter of 2024 of $1.09 per common limited partner unit, or $4.36 per common limited partner unit on an annualized basis. The cash distribution was paid on August 16, 2024, to unitholders of record on August 9, 2024.
DKL’s annual dividend of $4.36 translates to a yield of 10.13% at the current share price. Its four-year average dividend yield is 9.01%. And the company’s dividend payouts have increased at a CAGR of 5.4% over the past five years. DKL has raised its dividend for nine consecutive years.
For the second quarter that ended June 30, 2024, DKL’s net revenues rose 7.2% from the prior-year quarter to $264.63 million, and its operating income rose 14.2% year-over-year to $68.46 million. Net income attributable to partners stood at $41.06 million and $0.87 per limited partner unit, up 28.7% and 19.2% year-over-year, respectively.
Furthermore, DKL’s EBITDA and distributable cash flow grew 10.4% and 12.2% from the year-ago value to $102.39 million and $67.81 million.
As per the company’s 2024 outlook, MRO’s expected free cash flow is $2.20 billion for the year.
Analysts expect DKL’s revenue and EPS for the fourth quarter (ending December 2024) to grow marginally and 76.8% year-over-year to $255.49 million and $0.90, respectively. Also, the company topped the consensus EPS estimates in three of the four trailing quarters.
Shares of DKL have surged 10.5% over the past month and 5.2% over the past six months to close the last trading session at $43.05.
DKL’s POWR Ratings reflect its robust outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
The stock has a B grade for Value, Momentum, and Stability. Within the A-rated MLPs – Oil & Gas industry, DKL is ranked #5 in the list of 23 stocks.
Click here to access additional ratings of DKL for Sentiment, Growth, and Quality.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
ET shares were trading at $15.97 per share on Monday afternoon, down $0.10 (-0.62%). Year-to-date, ET has gained 23.11%, versus a 21.29% rise in the benchmark S&P 500 index during the same period.
About the Author: Rjkumari Saxena
Rajkumari started her career as a writer but gradually shifted her focus to financial journalism, leveraging her educational background in Commerce. Fascinated by the interplay of business and economic shifts in equities, she aspires to evolve as an analyst. With a knack for simplifying complex financial concepts, her mission is to empower investors with insights that lead to profitable decisions.
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