The energy sector looks well poised to grow owing to growing geopolitical tensions and the extension of OPEC+ oil supply cuts through the year's first half. Furthermore, the prospects of interest rate cuts later this year brighten the sector’s prospects.
Amid this backdrop, investors could consider buying fundamentally robust energy stocks Precision Drilling Corporation (PDS), VAALCO Energy, Inc. (EGY), and Adams Resources & Energy, Inc. (AE). Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the energy industry’s prospects.
According to the IEA, global oil demand grew by 1.6 million barrels per day (mb/d) in the first quarter of 2024. Crude oil prices have been rising lately due to heightened geopolitical tensions and the possibility of a tighter supply-demand balance throughout the year. Last month, OPEC+ members agreed to extend voluntary oil output cuts of 2.2 mb/d into the second quarter.
While the war in Gaza continues, there is trouble brewing between Iran and Israel after Israel bombed Iran’s embassy in Syria, which killed seven of Iran’s military advisers. Iran retaliated by launching an aerial attack on Israeli territory. This was followed by Israel launching a limited direct military attack on Iranian soil last week. The frequent skirmishes have led to concerns of a region-wide war.
Moreover, oil and LNG prices could shoot up if Iran chooses to block the vital Strait of Hormuz, which handles nearly 30% of the world’s oil trade. Ed Yardeni believes that crude oil prices could jump $100 per barrel if the Middle Eastern conflict worsens.
The Energy Information Association (EIA) lifted global oil consumption forecasts for this year by 0.5% to 102.91 million bpd and by 0.4% to 104.26 million bpd for 2025. OPEC forecasts that world oil demand will increase by 2.25 mb/d in 2024 and 1.85 mb/d in 2025.
The expected growth in oil demand will likely benefit companies involved in drilling, evaluation, production, and maintenance services. The global oilfield services market is anticipated to grow at a CAGR of 6.5% to reach $175.03 billion by 2031. Investors’ interest in energy stocks is evident from the Vanguard Energy Index Fund ETF Shares’ (VDE) 18% returns over the past three months.
Considering these factors, let’s examine the fundamentals of the three energy stocks mentioned above.
Precision Drilling Corporation (PDS)
Headquartered in Calgary, Canada, PDS provides onshore drilling, completion, and production services to exploration and production companies in the oil and natural gas, and geothermal industries. The company operates in two segments: Contract Drilling Services and Completion and Production Services.
PDS’ trailing-12-month asset turnover ratio of 0.66x is 27% higher than the industry average of 0.52x. Its trailing-12-month ROCE and ROTA of 20.61% and 9.58% are 16.3% and 42.5% higher than the industry averages of 17.73% and 6.72%, respectively.
For the fiscal fourth quarter that ended December 31, 2023, PDS’ revenue stood at CAD506.87 million ($368.64 million), while its adjusted EBITDA increased 66% year-over-year to CAD151.23 million ($109.99 million).
For the same quarter, its net earnings and net earnings per share stood at CAD146.72 million ($106.71 million) and CAD9.81, up significantly from the prior-year quarter, respectively. As of December 31, 2023, PDS’ total current assets amounted to CAD510.88 million ($371.55 million), compared to CAD470.67 million ($342.31 million) as of December 31, 2022.
Street expects PDS’ revenue for the fiscal year ending December 31, 2024, to increase marginally year-over-year to $1.45 billion. Its EPS for the quarter ending September 30, 2024, is expected to increase 60.7% year-over-year to $1.69. The company surpassed consensus revenue and EPS estimates in three of the trailing four quarters, which is impressive.
The stock has gained 23.1% year-to-date to close the last trading session at $66.82.
PDS’ robust prospects are reflected in its POWR Ratings. It has an overall B rating, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
It has a B grade for Value, Momentum, and Quality. It is ranked first out of 15 stocks within the Energy - Drilling industry. Click here for the additional POWR Ratings for PDS (Growth, Stability, and Sentiment).
VAALCO Energy, Inc. (EGY)
EGY acquires, explores, develops, and produces crude oil, natural gas, and natural gas liquids in Gabon, Egypt, Equatorial Guinea, and Canada.
On March 25, EGY announced that all partners signed the final documents, and the Government of Equatorial Guinea approved the Joint Operating agreement related to the previously approved Venus-Block P Plan of Development (POD).
The Block P Production Sharing Contract provides for a development and production period of 25 years from the date the POD is approved.
EGY’s trailing-12-month CAPEX / Sales of 21.36% is 47.3% higher than the industry average of 14.50%. Its trailing-12-month ROTC and ROTA of 17.66% and 7.33% are 112.3% and 9.1% higher than the industry averages of 8.32% and 6.72%, respectively.
EGY's revenues and adjusted EBITDAX for the fiscal fourth quarter that ended December 31, 2023, stood at $149.15 million and $95.88 million, up 54.4% and 92.5% year-over-year, respectively. For the same quarter, its adjusted net income and adjusted net income per share increased 102.9% and 94.7% from the prior-year quarter to $38.99 million and $0.37, respectively.
Street expects EGY’s revenue for the quarter ending March 31, 2024, to increase 13.5% year-over-year to $91.23 million. Its EPS for fiscal 2024 is expected to increase 75.8% year-over-year to $1.09. The stock has gained 63.9% over the past nine months to close the last trading session at $6.77. Over the past three months, it has gained 59.7%.
EGY’s POWR Ratings reflect its positive prospects. It has an overall A rating, equating to a Strong Buy in our proprietary rating system.
EGY has a B grade for Growth, Value, Sentiment, and Quality. Within the Energy - Oil & Gas industry, it is ranked #2 out of 82 stocks. To see the additional POWR Ratings of EGY for Momentum and Stability, click here.
Adams Resources & Energy, Inc. (AE)
AE markets, transports, terminals, and stores crude oil and other related products in the U.S. The company operates through four segments: Crude Oil Marketing, Transportation, Pipeline and Storage, and Logistics and Repurposing.
AE’s trailing-12-month asset turnover ratio of 7.37x is considerably higher than the industry average of 0.52x.
For the fiscal fourth quarter that ended December 31, 2023, AE’s total revenues stood at $709.75 million, while its adjusted cash flow increased 99.9% year-over-year to $6.84 million.
For the same quarter, its adjusted net earnings and adjusted earnings per common share stood at $90 thousand and $0.03, compared to adjusted net losses and adjusted losses per common share of $2.68 million and $0.85, respectively.
As of December 31, 2023, AE’s total current liabilities amounted to $210.79 million, compared to $231.06 million as of December 31, 2022.
Street expects AE’s revenue for fiscal 2025 to increase 3.8% year-over-year to $2.41 billion. The company surpassed the consensus revenue estimates in three of the trailing four quarters. Over the past three months, the stock has gained 21.9% to close the last trading session at $29.32.
AE’s POWR Ratings reflect this promising outlook. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
AE has a B grade for Growth, Value, Momentum, and Sentiment. Within the Energy - Oil & Gas industry, it is ranked first. To see AE’s ratings for Stability and Quality, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
PDS shares were trading at $65.63 per share on Monday morning, down $1.19 (-1.78%). Year-to-date, PDS has gained 20.89%, versus a 4.84% rise in the benchmark S&P 500 index during the same period.
About the Author: Neha Panjwani
From her school days, Neha harbored a profound fascination for finance, a passion that steered her toward a career as an investment analyst following the completion of her bachelor's degree in commerce. Currently enrolled in the CFA program, Neha is dedicated to further enriching her comprehension of investment fundamentals. Neha's primary objective is to aid retail investors in discerning optimal investment opportunities by diligently evaluating crucial aspects of financial instruments, with a primary focus on stocks and ETFs. Her commitment lies in empowering individuals to make informed and strategic investment decisions in the dynamic world of finance.
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