Escalating demand for crude oil, accompanied by restricted supply, is projected to bolster crude oil prices even further. This trend harbors the potential to enable enduring growth within the energy sector. Therefore, it could be worth investing in quality energy stocks BP p.l.c. (BP), Transportadora de Gas del Sur S.A. (TGS), and GeoPark Limited (GPRK) now.
Before a comprehensive analysis of these stocks, it is prudent to familiarize ourselves with what’s shaping the energy sector’s prospects.
Despite various economic and geopolitical challenges affecting most sectors, the energy sector has demonstrated remarkable resilience. The third quarter of 2023 is predicted to see increased global oil demand, owing predominantly to a surge in international air travel and the intensive summer driving season.
Goldman Sachs predicts that the robustness of this demand could create an unexpected deficit of up to 1.8 million barrels per day (bpd) in the second half of 2023 and a deficit of 600,000 bpd in 2024.
In addition to rising demand, declining U.S. inventories and additional OPEC+ output cuts are expected to provoke supply chain bottlenecks, subsequently elevating crude oil prices.
Alongside these market dynamics, concerns spring from the recent military coup in OPEC member country Gabon, which produces around 200,000 bpd of oil. Although these production volumes might be small, any disruption in the already strained oil market could significantly affect crude oil prices.
Amid these conditions, a bullish sentiment is growing in oil markets. On September 1, the per-barrel price for West Texas Intermediate (WTI) crude oil reached $85, representing this year’s peak.
Moreover, Standard Chartered anticipates that efficient output restraint by producers, led by Saudi Arabia, will pave the way for a price rally that will push Brent prices above the peak of $89.09/bbl achieved earlier this year, with their average fourth-quarter forecast at $93/bbl and a probable intra-quarter high surpassing $100/bbl.
Investor enthusiasm for energy stocks is evidenced by SPDR S&P Oil & Gas Exploration & Production ETF’s (XOP) 3.8% returns in the past five days, outperforming the broader S&P 500's 1.8% increase.
Considering these favorable trends, we will now delve into the fundamentals of the three quality stocks from the B-rated Foreign Oil & Gas industry, starting with the third choice.
Stock #3: BP p.l.c. (BP)
Headquartered in London, United Kingdom, BP produces natural gas and integrated gas and power, gas trading, onshore and offshore wind power operation, and hydrogen and carbon capture and storage facilities. The company operates through Gas & Low Carbon Energy; Oil Production & Operations; and Customers & Products segments.
On August 15, BP led a $12.5 million Series A financing, with additional investors including Clean Energy Ventures, Mitsubishi Heavy Industries, and GVP Climate in Low-Cost Hydrogen Electrolyzer Innovator, Advanced Ionics. This should bode well for the company.
Also, on August 3, BP made a £4 million investment in Dynamon, a UK-based software company specializing in developing advanced data analytics and simulation tools for commercial transport and logistics companies.
Along with the investment, Dynamon and BP have signed a commercial agreement to utilize ZERO or similar tools. Working together will help BP pulse diversify its fleet proposition and further develop its premium customer offer, supporting customers as they increasingly adopt EV solutions.
BP has announced a dividend per ordinary share of $0.727. BP pays a $1.74 per share dividend annually, translating to a 4.58% yield on the current share price. Its four-year average dividend yield is 6.20%.
BP also intends to execute a further $1.5 billion share buyback before reporting third quarterly results, following $4.5 billion in share buybacks already announced and completed this year.
BP’s trailing-12-month ROCE and ROTC of 27.2% and 16.72% are 26.3% and 57.7% higher than the industry averages of 21.57% and 10.60%, respectively. Its trailing-12-month cash from operations of $35.77 billion is significantly higher than the industry average of $653.45 million.
BP’s EBITDA grew at CAGRs of 35.4% and 11.6% over the past three and five years, respectively. In addition, its levered free cash flow grew at 42.3% and 30% CAGRs over the past three and five years, respectively.
For the fiscal second quarter that ended June 30, 2023, BP’s total revenues and other income stood at $49.48 billion. Its profit and profit attributable to BP shareholders per ADS came in at $1.95 billion and $0.60, respectively. Moreover, its adjusted EBITDA amounted to $9.77 billion.
BP’s operating cash flow stood at $6.29 billion. Also, as of June 30, 2023, its current liabilities were $81.47 billion, compared to $98.70 billion as of December 31, 2022.
BP’s revenue and EPS are expected to be $218.05 billion and $5.33, respectively, in the fiscal year ending December 2023. For the fiscal year 2024, its revenue is expected to come to $215.15 billion, and EPS is expected to increase 3.8% year-over-year to $5.53.
Shares of BP have gained 22.5% over the past year to close the last trading session at $38.13. Over the past three months, it gained 7%.
BP’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
BP also has an A grade for Momentum and a B for Quality. It is ranked #13 out of 43 stocks in the B-rated Foreign Oil & Gas industry.
To see BP’s grades for Growth, Value, Stability, and Sentiment, click here.
Stock #2: Transportadora de Gas del Sur S.A. (TGS)
Headquartered in Buenos Aires, Argentina, TGS transports natural gas produces, and commercializes natural gas liquids in Argentina. The company has four segments: Natural Gas Transportation Services; Liquids Production and Commercialization; Other Services; and Telecommunications.
Its trailing-12-month CAPEX/Sales of 27.47% is 97.5% higher than the industry average of 13.91%.
TGS’ revenue grew at CAGRs of 25.7% and 32% over the past three and five years, respectively. In addition, its total assets grew at 80.7% and 89% CAGRs over the past three and five years, respectively.
TGS’ sales revenues stood at ARS56.71 billion ($162.04 million) for the fiscal second quarter that ended June 30, 2023, while its gross profit came at ARS21.14 billion ($60.40 million). Its operating profit came at ARS15.12 billion ($43.20 million). Its total comprehensive income stood at ARS12.10 billion ($34.58 million), up 5.8% year-over-year.
The company’s total current assets stood at ARS158.04 billion ($451.58 million) as of June 30, 2023, compared to ARS116.41 billion ($332.61 million) as of December 31, 2022.
TGS’ revenue and EPS are expected to come at $662.62 million and $0.65 for the fiscal year ending December 2023. For the fiscal year 2024, its revenue and EPS are expected to come at $1.07 billion and $1.21, up 62.1% and 86.2% year-over-year, respectively. Moreover, it surpassed consensus EPS estimates in three of the trailing four quarters.
The stock has gained 80.6% over the past year to close the last trading session at $12.46. Over the past six months, it gained 16.6%.
TGS’ POWR Ratings reflect a positive outlook. The stock has an overall B rating, which indicates a Buy in our proprietary rating system.
TGS has a B grade for Value, Momentum, and Quality. Within the same industry, it is ranked #10.
Click here for TGS’ additional POWR Ratings (Growth, Stability, and Sentiment).
Stock #1: GeoPark Limited (GPRK)
Headquartered in Bogotá, Colombia, GPRK is engaged in developing and producing oil and gas reserves in Chile, Colombia, Brazil, Argentina, and Ecuador.
On August 9, GPRK announced a quarterly dividend of $0.132 per share, payable to the shareholders on September 7. GPRK pays a $0.53 per share dividend annually, translating to a 5.62% yield on the current share price. Its four-year average dividend yield is 1.56%. The company’s dividend payouts have grown at a CAGR of 84.7% over the past three years.
GPRK’s trailing-12-month levered FCF margin of 14.65% is 135.1% higher than the industry average of 6.23%. Its trailing-12-month ROCE, ROTC, and ROTA of 222.38%, 34.25%, and 19.67% are 931.1%, 223.1%, and 144% higher than the industry averages of 21.57%, 10.60%, and 8.06%, respectively.
GPRK’s EBITDA grew at CAGRs of 35.2% and 16.8% over the past three and five years, respectively. In addition, its levered free cash flow grew at 26.9% and 8.1% CAGRs over the past three and five years, respectively.
In June 2023, nine rigs were in operation (five drilling rigs and four workover rigs), and for the third quarter of 2023, three more rigs will be added (two drilling rigs and one workover rig).
The company acquired 1.7 million shares for $18.6 million in the first six months of 2023, representing approximately 3% of shares outstanding.
In the fiscal second quarter that ended June 30, 2023, GPRK’s revenue stood at $182.30 million, while its operating profit came at $69.50 million. Its net profit stood at $33.80 million.
Moreover, its cash and cash equivalents for the same quarter stood at $86.40 million. The company’s total current liabilities stood at $172 million as of June 30, 2023, compared to $229.20 million as of December 31, 2022.
The consensus revenue and EPS estimates stood at $770.34 million and $2.77, respectively, for the fiscal year ending December 2023, while for the fiscal year ending December 2024, its revenue and EPS are expected to increase 5.1% and 8.1% year-over-year to $809.51 million and $2.99, respectively. It surpassed the consensus revenue estimates in three of the four trailing quarters.
GPRK’s shares have gained marginally over the past month to close its last trading session at $9.39.
It is no surprise that GPRK has an overall B rating, equating to Buy in our POWR Ratings system.
GPRK has a B grade for Value, Sentiment, and Quality. Within the Foreign Oil & Gas industry, it is ranked #8.
Click here to see GPRK’s additional POWR Ratings for Growth, Momentum, and Stability.
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BP shares were unchanged in premarket trading Monday. Year-to-date, BP has gained 12.70%, versus a 18.87% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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