Rising global oil and gas demand, coupled with diminishing supply, may trigger a price surge, thereby providing considerable stimulus to the energy sector. Amid this backdrop, it could be wise to buy fundamentally strong oil and gas stocks Martin Midstream Partners L.P. (MMLP), CrossAmerica Partners LP (CAPL), and Star Group, L.P. (SGU). These stocks are rated – A (Strong Buy) in our proprietary POWR Ratings system.
Although the shift toward renewable energy is gaining momentum, world oil consumption continues to rise. The world oil demand will ascend by 2.3 million barrels per day (mb/d), reaching 101.7 mb/d by 2023. For 2024, the International Energy Agency (IEA) raised global oil demand to 930,000 bpd.
The U.S. Energy Information Administration (EIA) projects global liquid fuel consumption to increase by 1.8 million b/d in 2023 and by 1.3 million b/d in 2024. Most of the anticipated growth in liquid fuel demand is projected in non-OECD Asia, predominantly driven by China and India.
Forecasts indicate milder temperatures until December 23. Nevertheless, traditional cooling trends could stimulate augmented U.S. gas demand across the Lower 48 states, including export demands.
OPEC has been curbing supplies since late 2022 to stabilize the oil market. Despite declining oil prices, the group remains "cautiously optimistic" concerning oil market trends for 2024. OPEC+ has revealed voluntary output cuts of about 2.2 million barrels per day throughout the first quarter of 2024. The escalating demand juxtaposed with tightened supplies could lead to a price rise.
Oil prices have exhibited an upward trend recently following global shipping companies' decision to circumvent the Red Sea due to heightened security concerns, leading to a temporary cessation of services in the Bab el Mandeb strait. This key maritime checkpoint is a gateway to the Suez Canal and facilitates approximately 12% of global trade, including a significant proportion of international oil commerce. An escalation in this situation could propel oil prices further.
The U.S. EIA anticipates the Brent crude oil spot price to ascend from an average of $78 per barrel in December to around $84 per barrel in the first half of 2024, partly stimulated by recently declared OPEC+ production reductions. The Brent spot price is expected to average $83/b in 2024.
With these favorable trends in mind, let's delve into the fundamentals of the top three MLPs - Oil & Gas stock picks, beginning with the third choice.
Stock #3: Martin Midstream Partners L.P. (MMLP)
MMLP provides terminalling, processing, storage, and packaging services for petroleum products and by-products in the United States. The company operates in four segments: Terminalling and Storage; Transportation; Sulfur Services; and Natural Gas Liquids.
MMLP paid a quarterly cash distribution of $0.005 per common unit for the quarter that ended September 30, 2023. Its annualized dividend rate of $0.02 per share translates to a dividend yield of 0.80% on the current share price. Its four-year average yield is 8.87%.
MMLP’s trailing-12-month asset turnover ratio of 1.51x is 176.5% higher than the industry average of 0.55x, while its trailing-12-month levered FCF margin of 12.83% is 118.9% higher than the industry average of 5.86%.
During the first nine months of 2023, MMLP, utilizing free cash flow and a significant reduction in working capital due to the exit from the butane optimization business, reduced total debt by $53.6 million. As a result, adjusted leverage was decreased to 3.95 times at September 30, 2023, compared to 4.53 times at December 31, 2022.
In the fiscal third quarter that ended September 30, 2023, MMLP’s total revenues stood at $176.70 million. Its operating income came to $14.70 million, compared to an operating loss of $12.24 million in the year-ago quarter. Its adjusted EBITDA increased 39.1% year-over-year to $26.17 million.
For the nine months that ended September 30, 2023, MMLP’s net cash provided by operating activities stood at $106.07 million, compared to net cash used in operating activities of $16.76 million in the prior year period. Moreover, its cash at the end of the period came at $54 million, up 20% year-over-year.
The stock has gained 16.2% over the past six months to close the last trading session at $2.51. Over the past month, it has gained 2.9%
MMLP’s robust outlook is reflected in its POWR Ratings. The stock has an overall rating of A, translating to Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
MMLP has a B grade for Growth, Value, and Quality. Within the A-rated 26-stock MLPs - Oil & Gas industry, it is ranked #3.
Beyond what we’ve stated above, we have also rated the stock for Momentum, Stability, and Sentiment. Get all ratings of MMLP here.
Stock #2: CrossAmerica Partners LP (CAPL)
CAPL is involved in the wholesale distribution of motor fuels, operation of convenience stores, and ownership and leasing of real estate used in the retail distribution of motor fuels. The company operates through two segments: Wholesale and Retail.
On November 10, CAPL paid a quarterly dividend of $0.5250 per unit to the unitholders attributable. Its annualized dividend rate of $2.10 per share translates to a dividend yield of 9.30% on the current share price. Its four-year average yield is 11.49%.
CAPL’s trailing-12-month ROCE of 102.13% is 405.3% higher than the industry average of 20.21%, while its trailing-12-month asset turnover ratio of 3.42x is 523.4% higher than the industry average of 0.55x.
In the fiscal third quarter that ended September 30, 2023, CAPL’s operating revenues and gross profit stood at $1.21 billion and $100.44 million, respectively. Moreover, its adjusted EBITDA stood at $44.21 million.
For the same quarter, net income available to limited partners and earnings per common unit stood at $11.66 million and $0.31, respectively. Also, as of September 30, 2023, the company’s total assets stood at $123.26 million, compared to $118.41 million as of December 31, 2022.
Street expects CAPL’s revenue and EPS for the fiscal fourth quarter ending December 2023 to be $1.11 billion and $0.22, respectively. The company surpassed consensus EPS estimates in three of the trailing four quarters, which is impressive.
The stock has gained 13.9% year-to-date to close the last trading session at $22.58. Over the past six months, it has gained 14.3%.
CAPL’s promising prospects are reflected in its POWR Ratings. The stock has an overall A rating, equating to a Strong Buy in our proprietary rating system.
CAPL has an A grade for Growth and Sentiment and a B for Stability. It is ranked #2 within the same industry.
Click here for the additional POWR Ratings for CAPL (Value, Momentum, and Quality).
Stock #1: Star Group, L.P. (SGU)
SGU sells home heating and air conditioning products and services to residential and commercial home heating oil and propane customers in the U.S. It also sells diesel fuel, gasoline, and home heating oil on a delivery-only basis; provides plumbing services; and installs, maintains, and repairs heating and air conditioning equipment.
On October 30, SGU paid a quarterly dividend of $0.16 per common unit for the three months ended September 30, 2023. Its annualized dividend rate of $0.65 per share translates to a dividend yield of 5.21% on the current share price.
Its four-year average yield is 5.48%. SGU’s dividend payments have grown at CAGRs of 7% and 6.7% over the past three and five years, respectively.
SGU’s trailing-12-month asset turnover ratio of 2.18x is 872% higher than the industry average of 0.22x. Its trailing-12-month ROCE, ROTC, and ROTA of 10.97%, 6.80%, and 3.62% are 20.5%, 80.9%, and 51.2% higher than the industry averages of 9.10%, 3.76%, and 2.39%, respectively.
In the fiscal fourth quarter that ended September 30, 2023, SGU’s total sales and net cash provided by operating activities stood at $266.94 million and $20.94 million, respectively. For the twelve months that ended September 30, 2023, adjusted EBITDA stood at $96.87 million.
As of September 30, 2023, SGU’s total current liabilities stood at $364.88 million, compared to $381.08 million as of September 30, 2022. Moreover, its long-term debt came at $127.33 million, compared to $151.71 million as of September 30, 2022.
The stock has gained 10.2% over the past year to close the last trading session at $12.48. Over the past month, it has gained 6.6%.
It’s no surprise SGU has an overall A rating, translating to a Strong Buy in our proprietary rating system.
SGU has an A grade for Quality and a B for Value and Sentiment. It is ranked first within the same industry.
For SGU’s additional POWR Ratings (Growth, Momentum, and Stability), click here.
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CAPL shares were unchanged in premarket trading Thursday. Year-to-date, CAPL has gained 25.49%, versus a 24.30% 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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