Despite the ongoing shift to renewable energy sources, oil and gas is unlikely to see any fall in demand. In fact, many analysts believe that the long-term demand for oil and gas is expected to remain steady. In the near term, the oil and gas industry could benefit from the demand recovery in the Chinese market and the escalation of tensions in the Middle East.
Given this backdrop, it could be wise to consider investing in fundamentally strong energy stocks Repsol, S.A. (REPYY), Weatherford International plc (WFRD), Sunoco LP (SUN), and Transportadora de Gas del Sur S.A. (TGS).
Before diving deeper into the fundamentals of these energy stocks, let’s understand what’s shaping the industry’s prospects.
Since hitting $91 per barrel on October 9, crude oil prices have been in consolidation mode due to concerns over supply outstripping demand, a slowdown in global economic growth, and a lack of demand from the biggest consumer, China. Despite OPEC+’s crude oil production cut by 2.2 million bpd in the first quarter, oil prices have so far failed to stage a comeback primarily due to higher output by non-OPEC+ nations.
In October 2023, the U.S. produced 13.248 million barrels per day (bpd). Moreover, forecasts for 2024 indicate a new production record, reaching 13.2 million barrels per day and rising to more than 13.4 million barrels per day next year.
However, oil and gas prices are expected to recover as Beijing takes measures to revitalize its sluggish economy. China’s ongoing economic recovery can be gauged from its 5.2% GDP growth during the fourth quarter, which came higher than the 4.9% GDP growth during the third quarter. Moreover, tensions in the oil-rich Middle East continue to worry oil-importing countries.
The attacks on cargo ships by Houthi rebels are making things more complicated. Any flare-up in tensions within the region might lead to a disruption in the supply of oil and gas, which may lead to an escalation in prices. Goldman Sachs has warned that the disruptions by Houthi rebels extending to the Straits of Hormuz could potentially lead to a doubling of oil prices.
Furthermore, the Federal Reserve’s expected interest rate cuts this year could fuel the demand for commodities, especially crude oil. U.S. dry natural gas production is expected to increase between 1 and 2%, with prices averaging $2.70 per million British thermal units (MMBtu) in 2024 and reaching approximately $3/MMBtu in 2025.
The expected U.S. dry natural gas production of 105 Bcf/d in 2024 and 106 Bcf/d in 2025 would both be records. The IEA has forecast that global oil demand will rise by 1.2 million barrels per day this year compared to 2023, raising its outlook for the third consecutive month. It expects world oil demand to grow by 1.8 million barrels per day in 2025, driven by global economic growth and solid activity in China.
Similarly, OPEC, in its January Monthly Oil Market Report, said it expects oil demand to rise by 2.25 bpd this year and 1.8 million bpd next year. JPMorgan expects world oil demand to reach 106.9 mbd by 2030.
Given the continued dependence on oil and gas, companies related to oil and gas drilling, production, transportation, evaluation, and maintenance are expected to thrive. The global oilfield services market is projected to grow at a CAGR of 5.6% to reach $421.31 billion by 2030.
Considering these conducive trends, let’s discuss the fundamentals of the featured energy stocks.
Repsol, S.A. (REPYY)
Headquartered in Madrid, Spain, REPYY operates as an integrated energy company globally. It operates through Upstream, Industrial, Commercial, and Renewables segments. The company also offers asphalt products; installs, operates, and manages service stations; provides maritime services; constructs and operates oil refineries; explores and produces hydrocarbons, etc.
On September 7, REPYY announced an agreement to acquire the renewable energy platform ConnectGen. The transaction will strengthen its position as a global player in the renewable energy business, expanding its international footprint and contributing to its goal of 20,000 MW of installed renewable generation capacity by 2030.
In terms of the trailing-12-month asset turnover ratio, REPYY’s 0.86x is 56.8% higher than the 0.55x industry average.
REPYY’s sales for the fiscal third quarter, which ended September 30, 2023, amounted to €15.50 billion ($16.87 billion). Its operating income rose 26.9% year-over-year to €1.88 billion ($2.05 billion). The company’s total net income attributable to the parent increased 99.9% year-over-year to €1.37 billion ($1.49 billion).
Also, its EPS attributable to the parent stood at €1.07, registering an increase of 127.7% over the prior year's quarter.
Over the past month, the stock has declined 4.1% to close the last trading session at $14.35.
REPYY’s strong fundamentals are reflected in its POWR Ratings. It 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.
It has a B grade for Growth, Value, and Stability. Within the B-rated Foreign Oil & Gas industry, it is ranked #5 out of 43 stocks. To check the additional REPYY ratings for Momentum, Sentiment, and Quality, click here.
Weatherford International plc (WFRD)
WFRD provides equipment and services across the entire spectrum of oil, geothermal, and natural gas well operations, spanning drilling, evaluation, completion, production, and intervention. The company is structured into three segments: Drilling and Evaluation, Well Construction and Completions, and Production and Intervention.
On November 7, 2023, WFRD announced that it had signed an MOU with Honeywell to deliver a combined CygNet™ SCADA and Honeywell Emissions Management suite, offering a comprehensive solution for emissions management and advancing decarbonization strategies for customers, reducing emissions, and supporting sustainability goals.
In terms of the trailing-12-month levered FCF margin, WFRD’s 11.83% is 99.5% higher than the 5.93% industry average. Likewise, its 58.41% trailing-12-month Return on Common Equity is 196.9% higher than the industry average of 19.67%.
For the fiscal third quarter, which ended September 30, 2023, WFRD’s total revenues increased 17.2% year-over-year to $1.31 billion. Its adjusted EBITDA increased 42.5% over the prior year quarter to $305 million. The company’s net income attributable to WFRD increased 339.3% year-over-year to $123 million. Its income per share came in at $1.66, registering an increase of 325.6% year-over-year.
Also, its net cash provided by operating activities rose 7.5% year-over-year to $172 million.
Analysts expect WFRD’s revenue and EPS for the quarter ended December 31, 2023, to increase 10.7% and 34.9% year-over-year to $1.34 billion and $1.34, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 76% to close the last trading session at $97.33.
WFRD’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Growth, Momentum, and Quality. It is ranked #10 out of 82 stocks within the Energy – Oil & Gas industry. In addition to the ratings highlighted above, one can find WFRD ratings for Value, Stability, and Sentiment ratings here.
Sunoco LP (SUN)
SUN and its subsidiaries distribute and retail motor fuels in the United States. It operates in two segments: Fuel Distribution and Marketing and All Other. The company owns and operates retail stores under the APlus and Aloha Island Mart brand names and offers food, beverages, snacks, grocery and non-food merchandise, motor fuels, and other services.
On January 22, 2024, SUN announced the acquisition of NuStar Energy L.P. (NYSE: NS) in an all-equity deal. The transaction is expected to close in the second quarter of 2024. The acquisition enhances stability, strengthens SUN's financial foundation, and provides additional growth opportunities and additional cash flow generation.
The deal is projected to be immediately accretive, with at least $150 million in run-rate synergies by the third year following the closing of the transaction and synergies of at least $150 million of run-rate synergies by the third year post-closing.
In terms of the trailing-12-month Return on Common Equity, SUN’s 43.84% is 122.9% higher than the 19.67% industry average. Likewise, its 7.53% trailing-12-month Return on Total Assets is 2.8% higher than the industry average of 7.33%. Furthermore, the stock’s 8.68x trailing-12-month asset turnover ratio is 510.2% higher than the industry average of 0.55x.
SUN’s total revenues for the fiscal third quarter, which ended September 30, 2023, amounted to $6.32 billion. Its adjusted EBITDA stood at $257 million. The company’s net income and comprehensive income rose 227.7% over the prior-year quarter to $272 million. Also, its net income per common unit came in at $2.95, registering an increase of 293.3% year-over-year.
Street expects SUN’s EPS for the quarter ended December 31, 2023, to increase 143.6% year-over-year to $1.02. Over the past six months, the stock has gained 22.1% to close the last trading session at $54.85.
SUN’s solid prospects are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #10 within 25 stocks in the A-rated MLPs – Oil & Gas industry. It has an A grade for Growth and a B for Sentiment. Click here to see the additional ratings of SUN for Value, Momentum, Stability, and Quality.
Transportadora de Gas del Sur S.A. (TGS)
TGS, headquartered in Buenos Aires, Argentina, is engaged in the transportation of natural gas and the production and commercialization of natural gas liquids in Argentina and internationally. The company has four segments: Natural Gas Transportation Services, Liquids Production and Commercialization, Other Services, and Telecommunications.
In terms of the trailing-12-month CAPEX/Sales, TGS’ 37.28 % is 176.5% higher than the 13.48% industry average.
For the fiscal third quarter that ended September 30, 2023, TGS’ revenues amounted to ARS74.59 billion ($90.72 million). Its operating profit stood at ARS17.29 billion ($21.03 million). The company’s total comprehensive income came in at ARS4.88 billion ($5.94 million). Also, its EPS came in at ARS6.49.
Analysts expect TGS’ EPS for the quarter ending March 31, 2024, to increase 61.9% year-over-year to $0.28. Its revenue for the fiscal 2024 is expected to increase 1.5% year-over-year to $685.39 million. The company surpassed consensus EPS estimates in each of the trailing four quarters, which is impressive.
Over the past nine months, the stock has gained 37.6% to close the last trading session at $14.70.
TGS’s POWR Ratings reflect this positive outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #4 out of 43 stocks in the B-rated Foreign Oil & Gas industry. It has a B grade for Momentum, Sentiment, and Quality. Beyond what we have stated above, one can find TGS’ ratings for Growth, Value, and Stability here.
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REPYY shares were trading at $14.34 per share on Thursday afternoon, down $0.01 (-0.07%). Year-to-date, REPYY has declined -1.15%, versus a 2.33% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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