The energy industry is well-positioned for substantial growth this year as projections of a steady uptick in oil prices fueled by rising global demand and concerns over geopolitical tensions continuing in the Middle East, alongside production cuts by major oil producers and a gradual recovery of the Chinese economy, are expected to bolster the industry's performance.
Amid this backdrop, investors could consider buying fundamentally strong energy stocks: Phillips 66 (PSX), Cheniere Energy, Inc. (LNG), and Western Midstream Partners, LP (WES).
Before diving deeper into the fundamentals of these stocks, let's discuss what’s shaping the energy industry’s prospects.
Despite the shift towards renewable energy sources, oil and gas will continue to experience steady demand. This is due to the world’s escalating energy needs driven by the growing population and rapid industrialization. Oil prices rose to multi-month highs recently after Ukraine’s recent attacks on Russian refineries, forcing traders to assess the potential impact on global petroleum inventories.
Ukraine's drone attacks on Russian refineries could disrupt oil production, leading to short-term supply drops and creating market uncertainty, potentially leading to an increase in oil prices. Oil has had a good run over the past two months as OPEC+ extended the voluntary output cuts by 2.2 million bpd through Q2, with Russia joining in with an additional 417 thousand bpd cut.
According to the latest monthly report, OPEC forecasts a rise in global oil demand by 2.25 million bpd in 2024 and 1.85 million bpd in 2025. The group also increased its economic growth forecast for the current year, now seeing world economic growth of 2.8% in 2024. Strong global economic growth will likely boost oil demand.
Meanwhile, the Energy Information Administration's (EIA) Short-Term Energy Outlook predicts a record-high demand for natural gas in 2024 despite a potential decline in U.S. natural gas production. Moreover, domestic gas consumption is expected to rise from a record 89.09 bcfd in 2023 to 89.68 bcfd in 2024.
The EIA expects Brent crude oil spot price average to be $88 per barrel in the second quarter of 2024 and $87 per barrel this year.
U.S. liquefied natural gas exports are expected to increase to 12.34 billion cubic feet per day (bcfd) in 2024 and reach 14.43 bcfd in 2025. Moreover, the Federal Reserve’s three anticipated rate cuts this year will increase commodity demand, particularly crude oil.
The Chinese economy is showing signs of recovery as its policymakers look to revive economic growth. As China is the largest importer of crude oil, the government's stimulus measures to revive economic growth would also boost demand for crude oil.
Notably, Deutsche Bank forecasts that Brent Crude oil will reach $88 per barrel by the end of 2024. They anticipate a nearly balanced market in the first half, with OPEC+ discipline and seasonal demand strengthening in the second half.
Considering these conducive trends, let’s analyze the fundamental aspects of the featured energy stocks.
Phillips 66 (PSX)
PSX operates as an energy manufacturing and logistics company internationally. It operates through four segments: Midstream, Chemicals, Refining, and Marketing and Specialties (M&S). The company offers transportation, storage, processing, and marketing services for oil, gas, chemicals, and refined products.
In terms of the trailing-12-month Return on Common Equity, PSX’s 23.32% is 29.9% higher than the 17.95% industry average. Likewise, its 9.59% trailing-12-month Return on Total Capital is 16.3% higher than the industry average of 8.25%. Furthermore, the stock’s 1.94x trailing-12-month asset turnover ratio is 273.4% higher than the industry average of 0.52x.
For the fiscal fourth quarter that ended December 31, 2023, PSX’s total revenues and other income came in at $38.74 billion. Its adjusted Midstream and Chemical earnings came in at $754 million and $106 million, up 11.9% and 103.8% over the prior-year quarter, respectively. Also, the company’s adjusted net income attributable to PSX and adjusted EPS stood at $1.36 billion and $3.09, respectively.
Street expects PSX’s EPS for the fiscal 2025 to increase 8.8% year-over-year to $14.42. It surpassed the Street EPS estimate in three of the trailing four quarters. Over the past nine months, the stock has gained 70.5% to close the last trading session at $159.08.
PSX’s POWR Ratings reflect its solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #12 out of 83 stocks in the Energy - Oil & Gas industry. It has a B grade for Momentum. Click here to see the other ratings of PSX for Growth, Value, Stability, Sentiment, and Quality.
Cheniere Energy, Inc. (LNG)
LNG is an energy infrastructure company primarily engaged in liquefied natural gas (LNG) related businesses in the United States. It owns and operates the Sabine Pass LNG terminal in Cameron Parish, Louisiana, and the Corpus Christi LNG terminal near Corpus Christi, Texas. The company also owns the Creole Trail pipeline and operates the Corpus Christi pipeline.
On November 29, 2023, LNG announced a long-term Integrated Production Marketing (IPM) gas supply agreement with ARC Resources. This agreement will support the Sabine Pass Expansion Project and ensure increased LNG supplies into Europe, marking a significant step in LNG's strategy.
In terms of the trailing-12-month net income margin, LNG’s 49.95% is 274.6% higher than the 13.33% industry average. Likewise, its 84.47% trailing-12-month EBITDA margin is 130.5% higher than the industry average of 36.65%. Furthermore, the stock’s 22.94% trailing-12-month Return on Total Assets is 244.6% higher than the industry average of 6.66%.
For the fiscal year that ended December 31, 2023, LNG’s total revenues stood at $20.39 billion. Its income from operations rose 239.7% year-over-year to $15.49 billion. For the same quarter, the company’s net income and net income per common share attributable to common stockholders increased 591.9% and 622% from the year-ago value to $9.88 billion and $40.72, respectively.
Analysts expect LNG’s revenue for the quarter ending June 30, 2024, to increase marginally year-over-year to $4.13 billion. Its EPS for the fiscal 2025 is expected to increase 14% year-over-year to $10.28. It surpassed the consensus EPS estimate in each of the trailing four quarters. Over the past year, LNG’s stock has gained 7.2% to close the last trading session at $159.68.
LNG’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Momentum, Sentiment, and Quality. It is ranked #13 in the Energy - Oil & Gas industry. To see LNG’s Growth, Value, and Stability ratings, click here.
Western Midstream Partners, LP (WES)
WES and its subsidiaries operate as a midstream energy company primarily in the United States. The company is involved in gathering, compressing, treating, processing, and transporting natural gas; gathering, stabilizing, and transporting condensate, natural gas liquids (NGLs), and crude oil; and gathering and disposing of produced water.
In terms of the trailing-12-month gross profit margin, WES’s 70.15% is 53.4% higher than the 45.73% industry average. Likewise, its 41.51% trailing-12-month EBIT margin is 92.7% higher than the industry average of 21.54%. Furthermore, the stock’s 23.67% trailing-12-month Capex / Sales is 59.3% higher than the industry average of 14.85%.
WES’s total revenues and other income for the fiscal fourth quarter, which ended on December 31, 2023, grew 10.1% year-over-year to $858.21 million. Its operating income stood at $391.92 million. The company’s net income attributable to WES and net income per share came in at $288.35 million and $0.74, respectively.
For the quarter ending March 31, 2024, WES’s EPS and revenue are expected to increase 57.2% and 20.1% year-over-year to $0.82 and $881.53 million, respectively. Over the past year, the stock has gained 35.2% to close the last trading session at $34.98.
WES’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Growth, Momentum, and Quality. Within the A-rated MLPs - Oil & Gas industry, it is ranked #13 out of 24 stocks. In total, we rate WES on eight different levels. Beyond what we stated above, we also have given WES grades for Value, Stability, and Sentiment. Get all the WES ratings 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.
PSX shares were trading at $159.35 per share on Friday morning, up $0.27 (+0.17%). Year-to-date, PSX has gained 20.55%, versus a 10.15% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
3 Energy Stocks Surging Towards Profitability StockNews.com
