Most central banks worldwide have been hiking interest rates to bring inflation under control, enhancing the odds of a global recession. According to the IMF, one-third of the global economy is poised to contract this year or next.
However, any concerns regarding a slowdown in the energy demand seem to have been offset by supply-side constraints caused by the fallout of the conflict between Russia and Ukraine. The situation has also been aggravated by OPEC+’s decision to cut oil production by 2 million barrels/day, despite being urged by the U.S. administration to reconsider its stance.
“Due to the decision, volatility will likely return to the market, and despite concerns about the resilience of the global economy, the oil market is tight, all of which should serve as a tailwind for prices in the fourth quarter,” Rohan Reddy, director of research at Global X ETFs said.
Moreover, energy demand is expected to grow in the long run despite near-term headwinds. According to a report, the global energy as a service market is projected to grow at a 7.6% CAGR to reach $112.7 billion by 2030. Increasing energy efficiency activities and rising renewable energy adoption should boost the market’s growth.
Hence, it would be opportune to load up on fundamentally strong energy stocks Energy Transfer LP (ET) and Birchcliff Energy Ltd. (BIREF), available at attractive valuations, for significant upside potential.
Energy Transfer LP (ET)
ET owns and operates a portfolio of energy assets in the United States. The company sells natural gas to electric utilities, independent power plants, local distribution, and industrial end-users.
On August 24, ET announced that its subsidiary, Energy Transfer LNG Export, LLC, has entered into a 20-year LNG Sale and Purchase Agreement (SPA) with Shell NA LNG LLC related to its Lake Charles LNG project. Under the agreement, Energy Transfer LNG will supply Shell with 2.1 million tonnes of LNG per annum (mtpa). This SPA is expected to boost the company’s revenue streams.
On August 19, ET paid a quarterly dividend of $0.23 per share. The company pays $0.92 as a dividend annually, translating to a yield of 8% on the current price. The 4-year average yield stands at an impressive 10.44%. The company’s payout ratio is 60.6%, and its dividends have grown at a 1.9% CAGR over the last ten years.
In addition, ET announced the completion of the sale of its 51% interest in Energy Transfer Canada ULC (Energy Transfer Canada). The company expects the sale of these assets would allow it to deleverage its balance sheet further and redeploy capital within its footprint across the United States.
During the fiscal 2022 second quarter ended June 30, 2022, ET’s revenue increased 71.8% year-over-year to $25.95 billion. Its operating income grew 32.3% year-over-year to $2.11 billion. The company’s adjusted EBITDA amounted to $3.23 billion, up 23.4% year-over-year.
Furthermore, the company’s net income attributable to partners and net income per common unit came in at $1.33 billion and $0.39, registering increases of 111.8% and 95% from the prior-year period, respectively.
In terms of forward P/E, ET is currently trading at 7.58x, 10.7% lower than the industry average of 8.49x. The stock’s forward EV/Sales multiple of 1.07 is 39.8% lower than the industry average of 1.77. Also, its forward Price/Sales multiple of 0.39 compares with an industry average of 1.35.
Analysts expect ET’s revenue and EPS for the fourth quarter of the current fiscal (ending December 2022) to increase 29.2% and 34.5% year-over-year to $24.10 billion and $0.39, respectively. The company has surpassed the consensus EPS estimates in three of the trailing four quarters.
ET’s stock has gained 34.4% year-to-date and 17.6% over the past year to close the last trading session at $11.71.
ET's stable prospects have earned it an overall rating of B, which equates to a Buy in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
ET has an A grade for Momentum and a B grade for Value. It is ranked #34 among 94 stocks in the B-rated Energy-Oil & Gas industry.
Beyond what has been discussed above, we have also given ET grades for Sentiment, Growth, Quality, and Stability. Get access to all ET ratings here.
Birchcliff Energy Ltd. (BIREF)
BIREF is an intermediate oil and natural gas company headquartered in Calgary, Canada. It is engaged in acquiring, developing, developing, and producing natural gas, light oil, condensate, and natural gas liquids in Western Canada.
On October 13, 2022, BIREF declared a special cash dividend of $0.20 per common share payable on October 28 and approved an $80 million increase to its F&D capital budget for 2022. This comes as the company expects to have retired approximately $840 million of total debt and preferred shares since June 30, 2020, nearing its goal of zero total debt.
On October 3, BIREF paid a quarterly dividend of $0.02 per common share. The company pays $0.06 as a dividend annually, translating to a yield of 0.71% on the current price. The 4-year average yield stands at 2.91%. Dividends have grown at a 3.3% CAGR over the past five years.
BIREF’s total corporate sales came in at C$433.35 million ($313.95 million) for the fiscal 2022 second quarter ended June 30, 2022, up 113.7% year-over-year. The company’s adjusted fund flow during the same period increased 216.6% year-over-year to a record C$285.53 million ($206.86 million).
In addition, its net income to common shareholders during the quarter increased 387.7% year-over-year to C$213.85 million ($154.93 million). This translated to C$0.81 per basic common share, an increase of 406.3% over the previous-year quarter.
In terms of forward EV/EBITDA, BIREF is currently trading at 2.78x, 45.9% lower than the industry average of 5.14x. The stock’s forward EV/EBIT multiple of 3.56 is 56.3% lower than the 8.15x industry average.
Analysts expect BIREF’s revenue of $324.52 million for the fiscal 2022 third quarter (ended September 2022), indicating a rise of 54% year-over-year. The company’s revenue for the current year is expected to increase 48.3% from the year-ago value to $1.09 billion. The company has surpassed the consensus revenue estimates in three of the following quarters.
The stock has gained 70.3% year-to-date and 60.5% over the past year to close the last trading session at $8.60.
BIREF’s POWR Ratings reflect its fundamental strength. The company has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. It has an A grade for Momentum and a B for Growth and Quality.
It is ranked #7 among 94 stocks within the Energy – Oil & Gas industry. Click here to see additional POWR Ratings for Value, Stability, and Sentiment for BIREF.
ET shares rose $0.03 (+0.26%) in after-hours trading Friday. Year-to-date, ET has gained 47.27%, versus a -23.83% 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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