With Saudi Arabia deciding to extend its voluntary crude oil production cut, the prospects of the conventional energy sector in the foreseeable future look robust. The consequent tailwinds for quality energy stocks Repsol, S.A. (REPYY), Sasol Limited (SSL), and Ultrapar Participações S.A. (UGP) have understandably kept investors in hot pursuit.
Consumers have been above and beyond to compensate for the years spent indoors trying out-of-home experiences. As a result, air carriers are turning to bigger airplanes, even on shorter routes, and jumbo-jets, such as the Boeing 747 and the Airbus A380, are being brought back to help ease airport congestion and work around pilot shortages.
However, despite macroeconomic headwinds, supply has struggled to keep up with the demand. After Saudi Arabia-led OPEC+’s surprise announcement of a cut of more than a million barrels of output a day, in addition to a reduction of 2 million barrels a day agreed upon in October 2022, the heavyweight oil producer has decided to extend its production cut into September of this year.
This has taken about 3% of the world’s petroleum production taken off the market in seven months. The redrawing of the global energy map and shifting geopolitical inclinations in the Middle East since the beginning of the conflict in Ukraine has been nothing short of a windfall for U.S. energy producers. The U.S. has “gone from (being) a very domestically focused market into an international powerhouse.”
American crude oil production is going through a purple patch and is set to have a record-breaking couple of years. The EIA forecasts that U.S. crude oil production will average 12.4 million bpd in 2023 and 12.8 million bpd in 2024. This has been countering OPEC+ production cuts and keeping prices in check.
Moreover, the U.S. Senate voted to block China from purchasing oil from the Strategic Petroleum Reserve. But OPEC and the Paris-based International Energy Agency both forecast a pickup in demand that could lead to supply tightness in the second half of 2023. This could translate into upside potential for U.S. energy producers as well as the businesses serving them.
The G20 Energy Transitions Working Group, representing economies accounting for more than three-quarters of global emissions and economic output, recently met in Goa, India. Although some members emphasized the importance of making efforts toward phasing down unabated fossil fuels, the meeting ended without a consensus on the phase-out.
Hence, in the absence of unanimity in a turbulent and fractured geopolitical environment, fossil fuels could continue to play a significant role in the global energy mix to eradicate energy poverty and meet the growing energy demand in the foreseeable future. This, too, could benefit conventional energy producers, many of whom are also diversifying into clean energy as a hedge in favor of energy transition.
Given this backdrop, let’s look closely at the featured stocks.
Repsol, S.A. (REPYY)
As an integrated energy company headquartered in Madrid, Spain, REPYY is engaged in the exploration, development, sale, and transportation of crude oil and oil products; refining activities and petrochemicals business; and low carbon power generation. Its operating segments include Upstream; Downstream; Industrial; and Commercial and Renewables.
On July 25, the European Investment Bank (EIB) granted a €575 million ($628.89 million) loan to support REPYY’s rollout of wind and solar PV plants in Spain with a total capacity of 1.1 GW. The renewable energy facilities will generate electricity equivalent to the annual average consumption of around 645,000 Spanish households and will be operational before the end of 2025.
On May 17, REPYY announced it would develop renewable projects in Italy totaling 1,768 MW. With 60% of the projects in the country in advanced stages of development, once fully operational, the projects will add 943 MW of wind and 825 MW of photovoltaic solar projects to the multi-energy company's portfolio of renewable projects.
On May 9, REPYY announced that the General Shareholders' Meeting of CIDE Servicios Comerciales (owner of 100% of CHC Energía) approved the acquisition by Repsol of 50.01% of CHC Energía.
With this acquisition, the multi-energy company has acquired one of Spain’s leading electricity and gas retailers, with a broad positioning in rural areas and small municipalities, thereby taking another step forward in its strategy of consolidation and diversification.
For the first six months of 2023, REPYY’s net income came in at €1.42 billion ($1.55 billion). Moreover, with a combination of dividends and capital reduction, the company is expected to distribute close to €2.4 billion to shareholders in 2023.
By the end of the current year, REPYY will have reduced its share capital by 20% compared to that existing in December 2021, well above the target set by the 2021-2025 Strategic Plan.
REPYY’s stock has gained 2.9% over the past month and 23% over the past year to close the last trading session at $14.85, above its 50-day moving average of $14.46.
In terms of forward P/E, REPYY is trading at 3.67x, which is 65.3% lower than the industry average of 10.57x. And the stock’s forward EV/EBITDA and Price/Sales multiples of 2.33 and 0.30 are 59.7% and 79.9% lower than the industry averages of 5.77 and 1.51, respectively.
REPYY’s fundamental strength is reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
REPYY has an A grade for Momentum and a B grade for Value. The stock is ranked #14 of 42 in the B-rated Foreign Oil & Gas industry.
In addition to the above, additional POWR Ratings for REPYY’s Growth, Stability, Sentiment, and Quality can be found here.
Sasol Limited (SSL)
SSL is a global chemicals and energy company headquartered in Johannesburg, South Africa. The company operates through Energy Business, Chemical Business, and Corporate Centre segments.
On July 4, 2023, SSL and Uniper announced that both companies have jointly applied for funding from the Swedish Energy Agency for the next development phase and to the EU Innovation Fund for overall project funding for SkyFuelH2. The final decision on the award is likely to be received during the next study phase.
In SkyFuelH2, biomass, and renewable hydrogen feedstock will be combined using Sasol’s proprietary Fischer-Tropsch technology to produce SAF on an industrial scale, which will be a global first. The biomass comes from processed forestry residues. The hydrogen will come from an electrolysis unit that uses locally available renewable electricity. Both ensure a fully sustainable value chain and a product per the Renewable Energy Directive (RED II/III) to support the decarbonization of the aviation industry.
Street expects SSL’s revenue and EPS for the fiscal year 2023 to increase by 2.8% and 0.1% year-over-year to $16.68 billion and $2.80, respectively. Both metrics are expected to increase by a further 1% and 52.3% during the next fiscal to come in at $16.85 billion and $4.26, respectively.
The stock has gained 4.2% over the past month to close its last trading session at $13.04. It is trading above its 50-day moving average of $13.03.
SSL’s POWR Ratings reflect the bullishness surrounding the stock. The stock has an overall B rating, equating to a Buy in our proprietary rating system.
SSL has an A grade for Momentum and a B for Sentiment. It is ranked #13 of 42 stocks in the B-rated Foreign Oil & Gas industry.
Click here for additional POWR Ratings for SSL’s Growth, Quality, Stability, and Value.
Ultrapar Participações S.A. (UGP)
Headquartered in Sao Paulo, Brazil, UGP primarily stores and distributes automotive fuel. The company operates through five segments: Gas distribution (Ultragaz); Fuel distribution (Ipiranga); Chemicals (Oxiteno); Storage (Ultracargo); and Drugstores (Extrafarma).
In the first quarter that ended March 31, 2023, UGP’s adjusted EBITDA from continuing operations increased 20.1% year-over-year to R$ 1.08 billion ($222.55 million). For the Ultragaz segment, gross profit grew 61.9% year-over-year to R$ 512.10 million ($105.53 million), and its operating income was R$ 304.30 million ($62.71 million), up 114.3% year-over-year.
In addition, for the Ultracargo segment, net revenues rose 19.8% year-over-year to R$ 236.50 million ($48.73 million), while operating income came in at R$ 109 million ($22.46 million), an increase of 33.1% year-over-year.
The consensus EPS estimate of $0.23 for the fiscal year (ending December 2023) reflects a 319.4% year-over-year improvement, while its revenue is expected to come in at $26.74 billion. Both EPS and revenue are expected to increase 24.5% and 1.4% year-over-year to $0.29 and $27.11 billion, respectively.
The stock has gained 60.4% over the past six months and 76.6% year-to-date to close the last trading session at $3.85. It has a beta of 0.90.
UGP’s forward EV/Sales of 0.23x is 89.6% lower than the industry average of 2.20x. Likewise, the stock’s forward Price/Sales multiple of 0.16 is 89.5% lower than the industry average of 1.51.
UGP’s robust fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. It also has a B grade for Value, Stability, and Sentiment.
UGP is ranked #4 in the same industry. Click here for additional POWR Ratings for UGP’s Growth, Momentum, and Quality.
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REPYY shares were trading at $15.09 per share on Friday afternoon, up $0.24 (+1.60%). Year-to-date, REPYY has declined -1.47%, versus a 17.84% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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