Although there are supply limitations in place on crude oil by OPEC+, oil and gas demand looks weak in the near term. However, the long-term demand outlook for oil and gas remains strong despite the transition to cleaner energy sources.
Given that oil prices are expected to be stable this year, it could be wise to invest in fundamentally strong oil & gas stocks, Western Midstream Partners, LP (WES), Sunoco LP (SUN) and Adams Resources & Energy, Inc. (AE).
Before diving deeper into the fundamentals of these stocks, let’s first understand what’s shaping the oil and gas industry’s prospects.
Oil prices have been on the decline lately after climbing over $90 a barrel in September last year. Oil prices have been unable to stage a recovery due to concerns over softer global oil demand.
Last year, oil posted its first annual loss since 2020 as non-OPEC+ production increased and expectations of slower growth in demand, especially from China. The lack of demand for crude oil was reinforced by Saudi Arabia, which cut the official selling price (OSP) for February-loading Arab Light crude to Asian customers by $2 a barrel, to the lowest level in 27 months.
Despite the voluntary output cut of 2.2 million barrels of crude oil per day by OPEC+, it is unlikely to trigger a supply shortfall in the near term, as global oil inventories remain healthy. This year, the U.S. is expected to produce a record 13.2 million b/d of crude oil.
However, the Federal Reserve’s indication of possible interest rate cuts in 2024 could augment economic growth and reduce borrowing costs, potentially boosting demand for commodities, particularly crude oil. Moreover, the Israeli military has stated that it expects the war against Hamas to continue through 2024.
If the conflict spreads across the Middle East, then crude supplies could take a hit, leading to a potential boost in prices. Also, demand sentiment for crude oil got a boost after reports of U.S. crude oil inventories having fallen by 5.2 million barrels for the week ended January 5, higher than analysts’ expectations.
Furthermore, continued attacks on cargo ships, potential disruptions to oil tanker flows in the Red Sea, and oil output disruption in Libya could boost prices in the near term.
Interestingly, the long-term demand outlook for oil looks promising, with JP Morgan expecting world oil demand to reach 106.9 mbd by 2030. It believes oil prices could spike to $150/bbl in the near to medium term and $100/bbl over the long term. JPMorgan expects an average price of $83 a barrel in 2024. Meanwhile, OPEC sees oil demand rising by 2.25 million bpd in 2024.
Also, U.S. dry natural gas production is set to grow between 1 and 2%, reaching record levels of 105 Bcf/d in 2024. The EIA expects natural gas prices to average $2.70/MMBtu in 2024 and rise to $3.00/MMBtu in 2025, up from the average of $2.54/MMBtu last year. The price increases will be influenced by export expansion and steady consumption in the electric power sector.
Given the continued dependence on oil and gas, companies providing services related to oil and gas drilling, evaluation, production, and maintenance are expected to thrive. The global oilfield services market is projected to grow at a CAGR of 5.6% to reach $421.31 billion by 2030.
Considering these conducive trends, let’s discuss the fundamentals of the featured stocks.
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.
On September 5, 2023, WES announced the acquisition of Meritage Midstream Services II, LLC, expanding its Powder River Basin footprint with additional natural gas gathering and processing facilities, raising total processing capacity to 440 MMcf/d.
Michael Ure, President and CEO at WES, expressed excitement about the transformative acquisition of Meritage, emphasizing its meaningful expansion of financial and operational scale in the Powder River Basin. Ure highlighted the addition of significant producer inventory, diversification of the G&P customer portfolio, and steady, profitable growth through long-term contracts.
WES’ EBITDA grew at a CAGR of 1.2% over the past three years. Its EPS grew at a CAGR of 31% over the past three years. Moreover, its net income grew at a CAGR of 24.7% over the past three years.
For the fiscal third quarter that ended on September 30, 2023, WES’ total revenues and other income came in at $776.01 million. Its operating income rose 1% year-over-year to $360.76 million. Moreover, the company’s net income and net income per unit increased 3.9% and 6.1% over the prior-year quarter to $284.39 million and $0.71, respectively.
For the quarter that ended December 31, 2023, WES’s revenue is expected to increase 12.1% year-over-year to $873.92 million. Its revenue for the quarter ending March 31, 2024, is expected to increase 55.1% year-over-year to $0.81. Over the past nine months, the stock has gained 7.2% to close the last trading session at $28.46.
WES’ POWR Ratings reflect this positive outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the A-rated MLPs - Oil & Gas industry, it is ranked #6 out of 26 stocks. It has an A grade for Quality and a B for Momentum and Stability. To see the other ratings of WES for Growth, Value, and Sentiment, click here.
Sunoco LP (SUN)
SUN and its subsidiaries distribute and retail motor fuels in the United States. It operates in two segments: Fuel Distribution and Marketing and All Other.
SUN’s revenue grew at a CAGR of 24% over the past three years. Its EBITDA grew at a CAGR of 16.6% over the past three years. Moreover, its EBIT grew at a CAGR of 23.1% over the past three years.
SUN’s total revenues for the third quarter that ended September 30, 2023, came in at $6.32 billion. Its operating income increased 125.3% year-over-year to $338 million. The company’s net income and comprehensive income rose 227.7% over the prior-year quarter to $272 million. In addition, net income per common stood at $2.95, up 293.3% year-over-year.
Also, as of September 30, 2023, SUN’s current assets amounted to $2.48 billion, compared to $1.98 billion as of December 31, 2022.
Street expects SUN’s EPS for the quarter that ended December 31, 2023, to increase 150.8% year-over-year to $1.05, and its revenue for the quarter ending March 31, 2024, is expected to increase 7.9% year-over-year to $5.79 billion. Over the past six months, the stock has gained 35.1% to close the last trading session at $58.51.
SUN’s POWR Ratings reflect its solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It is ranked #15 in the MLPs - Oil & Gas industry. It has an A grade for Growth. Click here to see the additional ratings of SUN for Value, Momentum, Stability, Sentiment, and Quality.
Adams Resources & Energy, Inc. (AE)
AE primarily engages in the marketing, transportation, terminalling, and storage of crude oil and other related products in the United States. The company operates through four segments: Crude Oil Marketing, Transportation, Pipeline and Storage, and Logistics and Repurposing.
AE’s revenue grew at a CAGR of 32.2% over the past three years. Its total assets grew at a CAGR of 17% over the past three years. Moreover, its EBITDA grew at a CAGR of 26.9% over the past three years.
AE’s total revenues for the third quarter that ended September 30, 2023, came in at $760.61 million. Its operating earnings increased 31.1% year-over-year to 3.93 million. Additionally, the company’s net earnings rose 3.1% over the prior year’s quarter to $2.26 million, and its EPS came in at $0.88, up 76% year-over-year.
Street expects AE’s revenue for the quarter ending March 31, 2024, to increase 11.4% year-over-year to $744.70 million. Over the past month, the stock has declined 8.3% to close the last trading session at $24.40.
AE’s POWR Ratings reflect its solid prospects. It has an overall rating of B, translating to a Buy in our proprietary rating system.
It has a B grade for Growth and Value. Within the Energy - Oil & Gas industry, it is ranked #3 out of 84 stocks. To access AE’s additional grades for Momentum, Stability, Sentiment, and Quality, click here.
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WES shares were trading at $28.46 per share on Wednesday afternoon, down $0.00 (0.00%). Year-to-date, WES has declined -2.73%, versus a 0.09% 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.
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