The energy industry is likely to witness substantial growth this year, supported by the ongoing geopolitical tensions in the Middle East, expectations of a demand recovery in China, and concerns related to supply constraints arising out of the OPEC+ restrictions extending into the second quarter.
Amid this backdrop, it could be wise to add fundamentally strong energy stocks: Select Water Solutions, Inc. (WTTR), Unit Corporation (UNTC), 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.
Despite the shift to renewable energy sources, oil and gas are likely to continue enjoying steady demand due to global population growth, industrialization, economic development, and increased use of energy-intensive technologies. Crude oil prices rose for the second consecutive month in February after a period of losses last year.
Oil prices are likely to get a boost after the OPEC+ extended voluntary output cuts by 2.2 million bpd through Q2. Russia also announced an additional 417 thousand bpd cut in the second quarter. The decision aims to stabilize prices amidst demand concerns.
The OPEC+ cuts will lead to lower production from the whole group, coming in at 34.6 million bpd in the second quarter, lower than the earlier forecast of output rising above 36 million bpd.
Rising crude stockpiles and potential delays in U.S. rate cuts have raised concerns over the outlook for oil demand. However, according to the latest monthly report, OPEC forecasts global oil demand growth to remain steady at 2.2 million bpd in 2024, with a slight increase expected in the U.S. due to improving economic conditions, offsetting a downward revision in OECD Europe.
In 2025, global oil demand is projected to grow by 1.8 million bpd, with the OECD expected to grow by 0.1 million bpd and the non-OECD by 1.7 million bpd.
Moreover, The EIA forecasts growth in U.S. natural gas demand driven by domestic consumption in 2024, especially in the electricity sector, with an 11% increase expected compared to the previous five-year average. Despite a slight decrease in industrial sector consumption, overall demand is anticipated to rise due to weather-driven factors with higher demand from residential and commercial sectors.
Furthermore, the expected interest rate cuts from the Federal Reserve this year are likely to drive up demand for commodities, notably crude oil. Oil prices are also likely to get a boost due to the ongoing hostilities in the Middle East, as the Red Sea has become a no-go zone following the frequent attacks on shipping vessels by the Iran-backed Houthis.
The Houthis' missile and drone attacks have driven up the costs of transporting energy products and tightened supplies. Moreover, China, the biggest crude importer, has set an ambitious 2024 economic growth target of around 5%. This target would likely boost fuel consumption in the country, thereby boosting demand for oil.
This potential rise in oil demand could be advantageous for companies involved in drilling, evaluation, production, and maintenance services. The global oilfield services market is anticipated to thrive and is projected to expand at a CAGR of 6.5%, reaching $175.03 billion by 2031.
Considering these conducive trends, let’s analyze the fundamental aspects of the featured energy stocks.
Select Water Solutions, Inc. (WTTR)
WTTR and its subsidiaries provide water management and chemical solutions to the energy industry in the United States. The company operates through three segments: Water Services, Water Infrastructure, and Chemical Technologies.
On January 30, 2024, WTTR announced the acquisition of strategic water infrastructure assets in the Haynesville Shale and Rockies regions. The acquisitions will enhance its capacity by 450,000 barrels per day across 21 active saltwater disposal wells and other facilities.
The acquisitions include Tri-State Water Logistics, LLC's gathering and disposal assets, Iron Mountain Energy LLC's fluids and solids treatment assets, and additional disposal infrastructure and recycling capacity in the Rockies. They aim to strengthen WTTR’s position in sustainable water solutions for the energy industry.
In terms of forward EV/Sales, WTTR’s 0.59x is 69.2% lower than the 1.92x industry average. Its 3.40x forward EV/EBITDA is 38% lower than the 5.48x industry average. Likewise, its 0.52x forward Price/Sales is 61.3% lower than the 1.34x industry average.
WTTR’s revenues for the fourth quarter ended December 31, 2023, came in at $374.86 million. Its gross profit rose 31.2% year-over-year to $54.56 million. The company’s net income attributable to WTTR stood at $27.60 million, up 260.8% over the prior-year quarter.
In addition, its Class A net income per share attributable to common stockholders rose 285.7% year-over-year to $0.27.
Street expects WTTR’s revenue for the quarter ending September 30, 2024, to increase 3.8% year-over-year to $403.86 million. Its EPS for the fiscal 2025 is expected to increase 94.5% year-over-year to $1.30. It surpassed the Street EPS estimate in each of the trailing four quarters. Over the past three months, the stock has gained 12.6% to close the last trading session at $8.32.
WTTR’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 #8 out of 50 stocks in the Energy - Services industry. It has a B grade for Value. Click here to see the other ratings of WTTR for Growth, Momentum, Stability, Sentiment, and Quality.
Unit Corporation (UNTC)
UNTC and its subsidiaries explore, acquire, develop, and produce oil and natural gas properties in the United States. They operate through three segments: Oil and Natural Gas, Contract Drilling, and Mid-Stream.
On December 13, 2023, UNTC announced the completion of the sale of non-core oil and gas assets in the Texas Panhandle, generating $50 million in net cash proceeds. These were used to fund a special cash dividend of $5.00 per share to shareholders paid on December 27, 2023.
Phil Frohlich, CEO at UNTC, said, “This transaction is a great example of our strategy to prune our non-core assets and return value to our shareholders.”
In terms of the trailing-12-month EV/Sales, UNTC’s 0.51x is 74.4% lower than the 1.97x industry average. Likewise, its 0.91x trailing-12-month Price/Book is 42.5% lower than the 1.59x industry average. Also, its 1x trailing-12-month EV/EBITDA is 82.3% lower than the 5.63x industry average.
For the nine months that ended September 30, 2023, UNTC’s total revenues stood at $252.67 million. Likewise, its income from operations came in at $108.31 million. For the same quarter, the company’s net income and net income per common share attributable to UNTC increased 115.1% and 122.4% from the year-ago value to $191.50 million and $19.55, respectively.
Over the past nine months, UNTC’s stock has gained 14.2% to close the last trading session at $38.70.
UNTC’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 Value and Quality. It is ranked #13 out of 83 stocks in the Energy - Oil & Gas industry. To see UNTC’s Growth, Momentum, Stability, and Sentiment ratings, click here.
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.
In terms of forward EV/EBITDA, AE’s 5.03x is 8.2% lower than the 5.48x industry average. Its 0.03x forward Price/Sales is 98% lower than the 1.34x industry average. Moreover, its 0.04x forward EV/Sales is 97.8% lower than the 1.92x industry average.
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.
For fiscal 2024, AE’s revenue is expected to increase 1.7% year-over-year to $2.76 billion. Over the past month, AE’s stock has gained 14.9% to close the last trading session at $28.87.
AE’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, Value, and Momentum. Within the Energy - Oil & Gas industry, it is ranked #6. In total, we rate AE on eight different levels. Beyond what we stated above, we also have given AE grades for Stability, Sentiment, and Quality. Get all the AE ratings here.
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WTTR shares were trading at $8.21 per share on Tuesday morning, down $0.11 (-1.32%). Year-to-date, WTTR has gained 9.05%, versus a 6.80% 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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