Crude oil and gas prices are expected to remain higher in the upcoming months due to robust demand worldwide and tight supplies, boosting the energy sector’s growth prospects. Therefore, quality energy stocks Energy Transfer LP (ET), CVR Energy, Inc. (CVI), and Euronav NV (EURN) could be solid buys, all trading under $35.
The Organization of the Petroleum Exporting Countries (OPEC) forecasts world oil demand to rise by 2.44 million barrels per day (bpd) to average 102.1 million bpd in 2023. Next year, global oil demand is expected to grow by 2.25 million bpd. Developing economies, led by China, will account for most of this year’s demand growth, OPEC said in its Monthly Oil Market Report (MOMR).
Further, U.S. natural gas output and demand will likely hit record highs this year. The U.S. Energy Information Administration (EIA) projects dry gas production to grow to 103.72 billion cubic feet per day (bcfd) in 2023 and 105.13 bcfd next year, compared to 99.60 bcfd in 2022. The agency also forecasts domestic gas consumption to rise to 89.17 bcfd this year from 88.46 bcfd in 2022.
Soaring global demand for oil and gas and production cuts have sent oil prices to unprecedented levels since August last year. The Brent crude oil price averaged nearly $94 per barrel in September, $8/b higher than in August and up $19/b from June. Oil prices surged significantly last month after Saudi Arabia and Russia extended voluntary oil output cuts through the year-end.
Also, U.S. commercial crude oil inventories fell to the lowest level since early 2022 at the end of September, driving crude prices higher.
EIA expects crude oil prices to rise in the coming months, reflecting its expectations of tightening balances in world oil markets. Moreover, the ongoing war between Israel and Hamas raises the potential for oil supply disruptions. In its October Short-Term Energy Outlook (STEO), the agency expects the Brent spot price to average $91/b in the fourth quarter of 2023.
In addition, EIA forecasts the Brent spot price in 2024 to average $95 per barrel, $7 per barrel higher than in the previous month’s STEO.
Considering these favorable trends, let’s take a look at the fundamentals of the three best Energy - Oil & Gas stock picks, starting with number 3.
Stock #3: Euronav NV (EURN)
Headquartered in Antwerp, Belgium, EURN is an independent tanker company that engages in the ocean transportation and storage of crude oil internationally. The company provides floating, storage, and offloading (FSO) services. In addition, it owns and operates a fleet of vessels.
On October 12, EURN announced an agreement to lift the option for a second VLCC new build. In August, it announced the purchase of the first VLCC new building and the option to purchase a second one. The recent purchase will cost $112.20 million, and the vessel is expected to be delivered in the third quarter of 2026. The fleet expansion will drive EURN’s growth and profitability.
On September 7, EURN confirmed a two-year time charter with a blue-chip partner for the VLCC Donoussa (2016 dwt - 299.999). This contract will start immediately and generate nearly $24 million in cash over the duration of the contract for Euronav.
Lieve Logghe, EURN’s interim CEO and CFO, said, “We are delighted to share this commercial development which demonstrates the strength and value of the Euronav platform. The addition of another high-quality time charter reflects the underlying robustness of our market going into a key winter season and what we believe will be a sustained upcycle for the large crude tanker sector.”
EURN’s trailing-12-month gross profit margin of 68.14% is 43% higher than the 47.66% industry average. Likewise, the stock’s trailing-12-month EBIT margin and net income margin of 47.73% and 45.98% are favorably higher than respective industry averages of 24.27% and 14.19%.
Over the past five years, EURN’s revenue has increased at a CAGR of 24.6%. Also, the company’s EBITDA has grown at a CAGR of 47.4% over the same timeframe.
For the second quarter that ended June 30, 2023, EURN’s revenue increased 134.1% year-over-year to $348.16 million. Its other operating income was $10.07 million, up 97% from the prior year’s quarter. The company’s proportionate EBITDA came in at $247.61 million, compared to $74.94 million in the same period of 2022.
In addition, the company’s profit for the period was $161.82 million, compared to a loss of $4.90 million in the previous year’s quarter.
Street expects EURN’s revenue for the fiscal year (ending December 2023) to increase 48.7% year-over-year to $1.27 billion. The consensus EPS estimate of $2.48 for the current year indicates an improvement of 362.7% year-over-year.
For the fiscal year ending December 2024, the company’s revenue and EPS are expected to grow 4.7% and 19% year-over-year to $3.76 billion and $1.40, respectively.
Shares of EURN have gained 6.7% over the past six months and 10.7% year-to-date to close the last trading session at $17.86.
EURN’s sound fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
EURN has an A grade for Momentum and a B for Quality and Growth. It has ranked #12 out of 86 stocks in the Energy - Oil & Gas industry.
Click here for additional POWR Ratings for Value, Sentiment, and Stability for EURN.
Stock #2: Energy Transfer LP (ET)
ET owns and operates one of the most diversified portfolios of energy assets in the U.S., with nearly 120,000 miles of pipeline and associated energy infrastructure. Its core operations include complementary natural gas midstream, intrastate and interstate transportation and storage assets; and crude oil, natural gas liquids and refined product transportation and terminalling assets.
On October 20, ET announced a quarterly cash distribution of $0.3125 per Energy Transfer common unit ($1.25 on an annualized basis) for the third quarter of 2023. This cash distribution represents an increase from $0.31 per Energy Transfer common unit for the second quarter of 2023 and will be paid on November 20, 2023, to unitholders of record as of October 30, 2023.
The company’s annual dividend translates to a 9.21% yield on the prevailing price level, while its four-year average dividend yield is 10.31%.
ET’s trailing-12-month cash from operations of $10.21 billion is significantly higher than the $655.63 million industry average. Likewise, its trailing-12-month asset turnover ratio of 0.76x is 23.7% higher than the 0.61x industry average.
Over the past three years, ET’s revenue and net income have increased at CAGRs of 18.8% and 46.6%, respectively. Also, the company’s EPS has grown at a CAGR of 34.6% over the same period, while its tangible book value has improved at a 25.5% CAGR.
For the second quarter ended June 30, 2023, ET reported revenues of $18.32 billion and its operating income came in at $1.84 billion. Its net income was $1.23 billion or $0.25 per common unit, respectively. As of June 30, 2023, the company’s current assets and total assets stood at $10.60 billion and $105.13 billion, respectively.
Analysts expect ET’s EPS for the third quarter (ended September 2023) to increase 15.2% year-over-year to $0.33. The company’s EPS and revenue for the next year (ending December 2024) are expected to grow 12.6% and 1.3% from the prior year to $1.50 and $83.16 billion, respectively.
ET’s stock has gained 8.7% over the past six months and 10.5% over the past year to close the last trading session at $13.26.
ET’s POWR Ratings reflect this solid outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system.
The stock has a B for Value and Momentum. In the 86-stock Energy - Oil & Gas industry, ET is ranked #11.
In addition to the POWR Ratings I’ve just highlighted, you can see ET’s ratings for Growth, Quality, Sentiment, and Stability here.
Stock #1: CVR Energy, Inc. (CVI)
CVI is a diversified energy company that primarily engages in the renewable fuels, petroleum refining and marketing business, and the nitrogen fertilizer manufacturing business through its interest in CVR Partners, LP. The company operates in two segments: Petroleum and Nitrogen Fertilizer.
On August 21, CVI paid its shareholders a second quarter 2023 cash dividend of $0.50 per share and a special dividend of $1 per share. The company’s quarterly cash dividend represents an increase from $0.40 per share in the second quarter of 2022. The dividend increase reflects the company’s solid financial position.
The company’s annual dividend translates to a 6.04% yield on the current share prices, while its four-year average dividend yield is 12.81%. Its dividend payouts have grown at a CAGR of 2.1% over the past three years.
CVI’s trailing-12-month ROCE, ROTC, and ROTA of 69.55%, 21.36%, and 12.57% compare favorably to the industry averages of 21.34%, 10.59%, and 8.28%, respectively.
CVI’s revenue and EBIT have grown at respective CAGRs of 25.6% and 99.5% over the past three years. Likewise, its net income has increased at a CAGR of 95.4% over the same period, and its levered free cash flow has improved at a CAGR of 239.5%.
During the six months that ended June 30, 2023, CVI reported net sales of $4.52 billion. Net income attributable to CVR Energy stockholders was $325 million, an increase of 26% from the prior year’s quarter. Its earnings per share rose 25.7% year-over-year to $3.23. The company’s adjusted EBITDA was $680 million, up 2.1% year-over-year.
As of June 30, 2023, the company’s cash and cash equivalents were $751 million, compared to $510 million as of December 31, 2022.
Analysts expect CVI’s EPS for the third quarter (ended September 30, 2023) to increase 1.6% year-over-year to $1.93. Moreover, the company surpassed the consensus EPS and revenue estimates in three of the trailing four quarters, which is impressive.
CVI’s shares have gained 23.1% over the past six months to close the last trading session at $31.44.
CVI’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
CVI has an A grade for Momentum and a B for Quality. It is ranked #2 in the same industry.
To access additional ratings of CVI for Value, Sentiment, Growth, and Stability, click here.
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ET shares fell $13.57 (-100.00%) in premarket trading Friday. Year-to-date, ET has gained 22.85%, versus a 9.07% 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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