Expectations of tighter supply amid extended output cuts by major crude exporters, Saudi and Russia, and robust crude demand globally will likely push oil and gas prices higher, boosting the energy sector’s outlook. Given the industry’s tailwinds, buying fundamentally sound oil stocks Cheniere Energy Partners, L.P. (CQP) and Global Partners LP (GLP) could be wise.
However, investors could watch Viper Energy Partners LP (VNOM) and wait for a better entry point in this stock.
Before diving deeper into their fundamentals, let’s discuss what’s shaping the energy sector’s prospects.
Oil prices are on track to reach $100 per barrel this month for the first time in 2023 after rising by nearly 30% since June, following output cuts by the world’s biggest crude exporters, Saudi Arabia and Russia, and growing demand worldwide. Brent crude, the oil price benchmark, rose to a 10-month high last week of around $94 a barrel, an increase from $72 a barrel at its lowest point in June.
Organization of the Petroleum Exporting Countries (OPEC) kingpin Saudi Arabia announced on September 5 that it would extend its 1 million barrels per day (bpd) voluntary production cut until the year-end, while its non-OPEC leader Russia pledged to reduce oil exports by 300,000 barrels per day until the end of 2023.
The International Energy Agency (IEA) warned that Saudi Arabia and Russia’s supply constraints would likely result in a “substantial market deficit” through the fourth quarter of this year.
Moreover, last Tuesday, OPEC stuck to its forecasts for solid growth in global oil demand in 2023 and 2024, citing signs that major economies like China are faring better than expected despite macro headwinds such as rising interest rates and high inflation.
In its monthly report, OPEC said that world oil demand will grow by 2.44 million bpd to reach 102.1 million bpd this year, surpassing pre-COVID-19 levels. A lifting of COVID-19 lockdowns in China will primarily contribute to oil demand growth in 2023. Furthermore, OPEC has maintained a relatively upbeat view in 2024, expecting another “healthy” 2.25 million bpd growth.
“The ongoing global economic growth is forecast to drive oil demand, especially given the recovery in tourism, air travel and steady driving mobility,” OPEC stated in the report.
According to analysts at Bank of America, oil prices could soon rally above $100.
“Should OPEC+ maintain the ongoing supply cuts through year-end against Asia’s positive demand backdrop, we now believe Brent prices could spike past $100/bbl before 2024,” analysts led by Fransico Blanch said in a research note.
Further, Tamas Varga of oil broker PVM said a surge toward the $100 milestone was “plausible,” citing production cuts from Saudi Arabia and Russia, the structural shortage of diesel in Europe, upcoming refinery maintenance, and a rising consensus that the current cycle of tightening will soon come to an end.
With soaring demand globally and expectations of tighter supply amid extended output cuts by Saudi and Russia likely to cause oil prices to surge, the broader outlook for the oil and gas industry appears promising. Typically engaged in the oil and gas industry, Master Limited Partnerships (MPLs) can be a good income investment due to their high yields and preferential tax treatment.
Investors’ interest in oil stocks is evident from iShares U.S. Oil & Gas Exploration & Production ETF’s (IEO) 26% returns over the past six months.
With these favorable trends in mind, let’s take a look at the fundamentals of the three MLPs - Oil & Gas stocks, starting with number 3.
Stock to Hold:
Stock #3: Viper Energy Partners LP (VNOM)
VNOM owns, acquires, and exploits oil and natural gas properties in North America, focusing on owning and acquiring mineral and royalty interests in oil-weighted basins, primarily the Permian Basin. VNOM is a subsidiary of Diamondback Energy, Inc. (FANG).
On September 5, VNOM entered a definitive purchase and sale agreement to acquire certain mineral and royalty interests from affiliates of Warwick Capital Partners and GRP Energy Capital in exchange for nearly 8.02 million Viper common units and $750 million of cash. VNOM will acquire 4,600 net royalty acres in the Permian Basin and 2,700 net royalty acres in other major basins.
Acquiring high-quality mineral and royalty assets will provide a differentiated opportunity representing a significant value proposition for Viper and its unitholders. There is also high confidence visibility to near-term production growth results in meaningful and immediate accretion to relevant financial metrics, including a 7-8% rise to its expected 2024 return capital program.
On July 31, VNOM announced an increase in its annual base distribution by 8% to $1.08 per common unit. The company’s Board of Directors declared a base distribution of $0.27 per common unit for the second quarter of fiscal 2023, paid on August 17, 2023. Also, the company paid a variable cash distribution of $0.09 per unit for the second quarter of 2023.
In terms of forward EV/EBIT, VNOM is trading at 8.72x, 9.4% lower than the industry average of 9.63x. But the stock’s forward non-GAAP P/E multiple of 14.92 is 39.8% higher than the industry average of 10.67. Also, the stock’s forward EV/EBITDA of 6.91x compares to the industry average of 5.83x.
For the second quarter that ended June 30, 2023, VNOM’s average production was 21,143 bo/d, an increase of 7% year-over-year, the highest in the company’s history. Its adjusted net income attributable to VNOM grew 1.3% from the year-ago value to $33.52 million. However, the company’s consolidated adjusted EBITDA was $142.59 million, down 33.7% year-over-year.
In addition, VNOM’s operating income rose 32.8% from the prior year’s quarter to $160.79 million. Its cash inflows from operating activities were $145.43 million, an increase of 10.9% year-over-year.
Analysts expect VNOM’s EPS for the fiscal year (ending December 2023) to decline 0.4% year-over-year to $1.91. The company’s revenue for the current year is expected to increase 18.7% year-over-year to $704.23 million. However, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.
Furthermore, the company’s revenue and EPS for the fiscal year 2024 are expected to grow 18.2% and 23.6% from the previous year to $832.56 million and $2.36, respectively.
Shares of VNOM have gained 8.6% over the past six months to close the last trading session at $28.52. However, the stock has declined 8.9% over the past year.
VNOM’s POWR Ratings reflect its mixed prospects. The stock has an overall C rating, equating to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
VNOM has an A grade for Quality and a B for Sentiment and Momentum. It has a C grade for Value. It is ranked #13 out of 26 stocks in the A-rated MLPs - Oil & Gas industry.
Click here for the additional POWR Ratings for VNOM (Growth and Stability).
Stocks to Buy:
Stock #2: Global Partners LP (GLP)
GLP engages in the purchasing, selling, gathering, blending, storing, and logistics of transporting gasoline and gasoline blendstocks, distillates, residual oil, renewable fuels, crude oil, and propane and serves wholesalers, retailers, and commercial customers internationally. It operates through Wholesale; Gasoline Distribution and Station Operations; and Commercial segments.
In June, GLP began operating the 64 Houston-area convenience and fueling facilities acquired in its previously disclosed joint venture with ExxonMobil, expanding its presence into Texas. The expansion of the company’s retail footprint reflects the continued execution of its overall growth strategy to acquire, invest, and optimize.
On July 25, GLP announced that the Board of Directors of its general partner, Global GP LLC, declared a cash distribution of $0.6750 per unit ($2.70 per unit on an annualized basis) on all its outstanding common units from April 1, 2023, through June 30, 2023. The distribution was paid on August 14, 2023, to unitholders of record as of August 8, 2023.
GLP’s forward annual dividend of $2.70 translates to a yield of 8.39% at the current share price. Its four-year average dividend yield is 11.17%. The company’s dividend payouts have grown at a 10.9% CAGR over the past three years.
In terms of forward EV/Sales, GLP is trading at 0.15x, 93.3% lower than the industry average of 2.24x. Likewise, the stock’s forward Price/Sales multiple of 0.06 is 96% lower than the industry average of 1.57.
For the second quarter that ended June 30, 2023, GLP’s gross profit from the Gasoline Distribution and Station Operations segment increased marginally year-over-year to $199.08 million. The company reported a net income and net income per common limited partner unit of $41.39 million and $1.05, respectively.
Additionally, as of June 30, 2023, the company’s cash and cash equivalents were $11.04 million, compared to $4.04 million as of December 31, 2022. Its current liabilities reduced to $754.35 million, compared to $971.48 million as of December 31, 2022.
Analysts expect GLP’s revenue for the fiscal year (ending December 2024) to increase 22.4% year-over-year to $21.01 billion. The consensus EPS estimate of $3.69 for the next year indicates a 6.7% rise year-over-year. Moreover, the company topped the consensus EPS estimates in three of the trailing four quarters.
GLP’s stock has gained 10.2% over the past six months and 13.3% over the past year to close the last trading session at $32.18.
GLP’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
GLP has an A grade for Value. It has a B grade for Momentum, Sentiment, and Stability. It is ranked #7 out of 26 stocks in the same industry.
Beyond what we stated above, we also have GLP’s ratings for Growth and Quality. Get all GLP ratings here.
Stock #1: Cheniere Energy Partners, L.P. (CQP)
CQP provides liquefied natural gas (LNG) to integrated energy companies, utilities, and energy companies worldwide. The company owns and operates natural gas liquefaction and export facility at the Sabine Pass LNG production terminal located in Cameron Parish, Louisiana.
CQP is developing an expansion adjacent to the SPL project comprising up to 3 natural gas liquefaction trains with an expected total production capacity of nearly 20 mtpa of LNG (the SPL Expansion Project).
In May, certain subsidiaries of Cheniere Partners entered the pre-filing review process with the Federal Energy Regulatory Commission (FERC) under the National Environmental Policy Act (NEPA) for the SPL Expansion Project, and in April, executed a contract with Bechtel Energy Inc. to provide the Front End Engineering and Design (FEED) for the project.
Concerning the second quarter of fiscal 2023, CQP declared a cash distribution of $1.03 per common unit to unitholders of record as of August 7, 2023, comprising a base amount of $0.775 and a variable amount equal to $0.255.
CQP’s annual dividend of $3.10 per share translates to a 5.84% yield on the prevailing share price. Its four-year average dividend yield is 7.06%. The company’s dividend payouts have increased at a 6.9% CAGR over the past three years and an 8.6% CAGR over the past five years. CQP has raised its dividend for six consecutive years.
In terms of forward non-GAAP P/E, CQP is trading at 10.01x, 6.2% lower than the industry average of 10.67x. Moreover, the stock’s trailing-12-month EV/EBIT multiple of 7.38 is 5% lower than the industry average of 7.77.
During the second quarter that ended June 30, 2023, CQP reported total revenues of $1.93 billion. Its income from operations grew 47.4% year-over-year to $818 million. The company’s net income rose 81.9% from the previous year’s quarter to 622 million, and its net income per common unit came in at $0.84, an increase of 236% year-over-year.
CQP’s revenue for the fiscal year (ending December 2024) is expected to increase 8.7% from the prior year to $10.78 billion. Additionally, the company surpassed the consensus EPS and revenue estimates in three of the trailing four quarters, which is impressive.
The stock has gained 7.2% over the past month and 21.3% over the past six months to close its last trading session at $53.07.
CQP’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
CQP has a B grade for Growth, Momentum, Stability, and Quality. Among the 26 stocks in the A-rated MLPs - Oil & Gas industry, it is ranked #2.
In addition to the POWR Ratings highlighted above, you can see CQP’s ratings for Growth, Value, and Sentiment here.
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CQP shares were unchanged in premarket trading Monday. Year-to-date, CQP has declined -0.61%, versus a 16.81% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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