The energy sector witnessed a mild slowdown earlier this year after an exceptionally good 2022, thanks to high oil and gas prices fueled by a demand-supply imbalance aggravated by Russia’s invasion of Ukraine. However, the sector looks set for solid recovery amid increased summer travel, constrained supplies due to turbulent geopolitics, and production cuts.
The consequent gains for US energy producers could also translate into tailwinds for fundamentally strong businesses NOW Inc. (DNOW), North American Construction Group Ltd. (NOA), and Geospace Technologies Corporation (GEOS) that serves the energy ecosystem.
Revenge travel originates in “baofuxing xiaofei” or “revenge spending,” an economic trend in 1980s China when a growing middle class had an insatiable appetite for foreign luxury goods.
Since e-commerce, albeit with a few hiccups in the supply chain, was able to satiate the appetite for goods through the pandemic, Americans are now going above and beyond to compensate for the years spent indoors trying to out-of-home experiences with virtual ones.
As a result, air carriers are turning to bigger airplanes, even on shorter routes, and jumbo-jets, such as the Boeing 747 and the Airbus A380, are being brought back to help ease airport congestion and work around pilot shortages.
Moreover, Saudi Arabia-led OPEC+ surprise announcement of a cut of more than a million barrels of output a day, in addition to a reduction of 2 million barrels a day agreed upon in October 2022, has taken about 3% of the world’s petroleum production taken off the market in seven months.
In addition to growing Asian economies absorbing the bulk of the remaining supplies, Europe’s increasing reliance on American shipments and Russia’s announcement of a voluntary production cut of 500,000 barrels a day in response to Western sanctions could keep demand resilient.
The redrawing of the global energy map and shifting geopolitical inclinations in the Middle East since the beginning of the conflict has been nothing short of a windfall for U.S. energy producers. The U.S. has “gone from (being) a very domestically focused market into an international powerhouse.”
Hence, although energy prices have retreated from last year’s record highs, strong demand from extensive summer traveling and constrained supply amid recently announced production cuts by top exporters could significantly boost oil and gas prices and benefit energy producers as well as the businesses serving them.
Moreover, during the spring months, energy companies conduct maintenance on their refineries, shutting them down and limiting capacity until late May. This could translate into increased activity and strong business momentum for service providers.
With the above context, let’s take a closer look at the featured stocks.
NOW Inc. (DNOW)
As a global distributor to the oil, gas, and industrial markets, DNOW supplies energy and industrial products and packaged, engineered process and production equipment under the DistributionNOW and DNOW brand names. The company’s segments include the United States, Canada, and International.
Despite headwinds related to inclement weather, lower U.S. rig counts and completions, and weaker oil and gas prices, for the fiscal first quarter, DNOW’s revenue increased by 23.5% year-over-year to $584 million. During the same period, the company’s non-GAAP EBITDA increased by 67.9% year-over-year to $47 million, while its non-GAAP net income came in at $28 million, or $0.25 per share, up 86.7% and 78.6% year-over-year.
DNOW’s trailing-12-month Return on Common Equity (ROCE), Return on Total Capital (ROTC), and Return on Total Assets (ROTA) of 16%, 12.3%, and 9.7% surpass the industry averages of 13.8%, 7%, and 5.1%, respectively.
Analysts expect DNOW’s revenue and EPS for the fiscal years to increase by 10.6% and 7.6% year-over-year to $2.36 billion and $1.02, respectively. Both metrics are expected to keep growing over the next two fiscals. Moreover, DNOW’s impressive earnings surprise history has seen it surpass consensus EPS estimates in each of the trailing four quarters.
The stock has gained 7% over the past month and 15.1% over the past year to close the last trading session at $11.12.
DNOW’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
DNOW has an A grade for Momentum and B for Growth, Value, and Sentiment. It is ranked #3 of 47 stocks in the Energy – Services industry.
Click here for additional ratings for DNOW’s Stability and Quality.
North American Construction Group Ltd. (NOA)
Headquartered in Acheson, Canada, NOA provides equipment maintenance, mining, and heavy construction to its clients in resource development and industrial construction sectors in the U.S., Canada, and Australia. The company operates through two broad divisions: Heavy Construction & Mining; and Equipment Maintenance.
On July 7, NOA paid a quarterly dividend of C$0.10, payable to common shareholders of record at the close of business on May 26, 2023. The company pays $0.27 annually as dividends, translating to a trailing-12-month yield of 1.42% at the current price. Dividend payouts have increased at 33.6% CAGR over the past five years.
For the fiscal first quarter that ended March 31, 2021, NOA’s revenues increased 37.3% year-over-year to C$242.61 million ($184.53 million), while its gross profit improved 86.4% year-over-year to C$40.92 million ($31.12 million).
During the same period, NOA’s adjusted EBITDA increased by 46.6% year-over-year to C$84.62 million ($64.36 million), while its adjusted net earnings came in at C$25.28 million ($19.23 million), or C$0.96, up 73.1% and 88.2% year-over-year, respectively.
NOA’s trailing-12-month ROCE of 24.56% is 4.6% higher than the 23.48% industry average and 31.2% higher than the 5-year average of 18.73%.
Ahead of its earnings release on July 26, Street expects NOA’s revenue and EPS for the fiscal second quarter ended June 30 to increase 3.1% and 123.1% year-over-year to $134.55 million and $0.29, respectively. Moreover, it has surpassed the EPS estimates in three of the trailing four quarters. Both revenue and EPS are expected to increase by 13.2% and 2.4% year-over-year to $650.51 million and $1.84, respectively.
NOA’s stock has gained 35.9% over the past six months and 49.2% year-to-date to close the last trading session at $19.25.
NOA’s stable outlook is also reflected in its overall rating of B, which translates to a Buy in our POWR Rating system. It has an A grade for Momentum and grades B for Growth, Stability, and Quality.
Unsurprisingly, it tops the list of 45 stocks in the Energy – Services industry. Click here for the Value and Sentiment ratings of NOA.
Geospace Technologies Corporation (GEOS)
As a designer and manufacturer of seismic instruments and equipment, GEOS operates through Oil & Gas Markets; Adjacent Markets; and Emerging Markets segments.
On June 27, GEOS announced an extended rental contract with an international marine geophysical services provider who will rent the new product, Mariner®, shallow water seabed wireless seismic data acquisition nodes. Based on current contract terms, including potential options, the estimated value of the agreement is expected to reach $20 million.
For the fiscal second quarter that ended March 31, 2023, GEOS’ total revenue increased 27% year-over-year to $31.37 million, driven by a 336% year-over-year increase in rental revenue to $13.67 million. During the same period, its gross profit for the same quarter stood at $12.95 million, up 90.1% year-over-year.
Consequently, GEOS’ net income for the quarter came in at $4.64 million, or $0.35 per share, compared to a loss of $1.47 million, or $0.11, during the previous-year quarter.
The stock has gained 75% over the past six months and 98.5% year-to-date to close its last trading session at $7.98.
GEOS’ robust outlook is reflected in its overall POWR Rating of B, which translates to a Buy in our proprietary rating system. It has an A grade for Momentum and B for Growth, Sentiment, and Quality.
GEOS is ranked #2 in the same industry. Click here for additional POWR Ratings for Value and Stability for GEOS.
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NOW shares were trading at $581.31 per share on Friday afternoon, up $3.86 (+0.67%). Year-to-date, NOW has gained 49.72%, versus a 18.58% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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