Despite the ongoing transition to renewable energy sources, oil and gas demand is expected to remain steady in the long term. Amid the production cuts by OPEC+, oil demand is expected to be supported by factors like the economic recovery in China, interest rate cuts by central banks, and escalating tensions in the Middle East, positioning the industry for growth.
Amid this backdrop, investors could consider buying fundamentally strong oil and gas stock CrossAmerica Partners LP (CAPL) while waiting for a better entry point in Tourmaline Oil Corp. (TRMLF) and Suburban Propane Partners, L.P. (SPH) could be prudent.
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 remained rangebound over the past few months due to concerns over lower demand from China and slower global economic growth. However, oil prices are expected to rise this year as the IMF raised its global economic growth outlook, upgrading the outlook for both the United States and China. Oil demand is expected to rise faster than expected due to the easing of inflation.
As announced in November, OPEC+ has output cuts of 2.2 million bpd in place for the first quarter. OPEC and its allies have been trying to prevent a global surplus of crude oil and shore up prices. Recently, OPEC+ said that it will stick to oil production cutbacks for the first quarter.
Saudi Energy Minister Prince Abdulaziz bin Salman said that the current OPEC+ curbs could be prolonged beyond the first quarter if needed. This measure, if taken, could boost oil prices this year. World oil demand is set to reach a record 103 million barrels per day this year.
Furthermore, expectations of oil prices rising this year remain as the conflict rages on in the Middle East and cargo ships come under attack from the Iran-aligned Houthis. OPEC, in its January Monthly Oil Market Report, anticipates oil demand to grow by 2.25 million barrels per day this year and 1.8 million bpd next year.
U.S. dry natural gas production is projected to rise by 1 to 2%, with prices averaging $2.70 per million British thermal units (MMBtu) in 2024 and potentially reaching $3/MMBtu by 2025. In 2024 and 2025, the projected U.S. dry natural gas production of 105 Bcf/d and 106 Bcf/d, respectively, would both set new records.
Also, the IEA forecasts global oil demand growth to come in at 2.2 million barrels per day (bpd) this year and 1.8 million bpd in 2025, driven by worldwide economic growth and strong activity in China.
Let us now discuss the fundamentals of the featured stocks.
Stock to Buy:
CrossAmerica Partners LP (CAPL)
CAPL engages in the wholesale distribution of motor fuels, operation of convenience stores, and ownership and leasing of real estate used in the retail distribution of motor fuels. It operates in two segments, Wholesale and Retail.
In terms of the trailing-12-month Return on Common Equity, CAPL’s 102.13% is 427.7% higher than the 19.35% industry average. Likewise, its 3.42x trailing-12-month asset turnover ratio is 518.4% higher than the 0.55x industry average.
CAPL’s operating revenues for the fiscal third quarter that ended September 30, 2023, stood at $1.21 billion, and its gross profit came in at $100.44 million. The company’s adjusted EBITDA stood at $44.21 million.
For the same quarter, net income available to limited partners and earnings per common unit stood at $11.66 million and $0.31, respectively. Also, as of September 30, 2023, the company’s total current assets stood at $123.26 million, compared to $118.41 million as of December 31, 2022.
Street expects CAPL’s revenue for the quarter ending March 31, 2024, to increase 11.4% year-over-year to $1.13 billion, and its EPS for fiscal 2024 is expected to increase 5.9% year-over-year to $0.90. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past six months, the stock has gained 6.4% to close the last trading session at $21.60.
CAPL’s POWR Ratings reflect its solid prospects. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Growth and Sentiment and a B for Momentum and Stability. Within the A-rated MLPs - Oil & Gas industry, it is ranked #4 out of 25 stocks. To access CAPL’s additional grades for Value and Quality, click here.
Stocks to Hold:
Tourmaline Oil Corp. (TRMLF)
Headquartered in Calgary, Canada, TRMLF explores and develops oil and natural gas properties in the Western Canadian Sedimentary Basin. It holds interests in properties located in the Alberta Deep Basin, Northeast British Columbia Montney, and the Peace River High Triassic oil complex.
On November 17, 2023, TRMLF successfully finalized its acquisition of Bonavista Energy Corporation for $1.45 billion, comprising $725 million in TRMLF common shares and $725 million in cash, excluding Bonavista's net debt. The company anticipates exceeding 600,000 boepd in exit 2023 production, encompassing the newly acquired Bonavista volumes.
In terms of the trailing-12-month gross profit margin, TRMLF’s 64.94% is 40.3% higher than the 46.28% industry average. Likewise, its 19.10% trailing-12-month net income margin is 48% higher than the 12.91% industry average. On the other hand, its 5.56% trailing-12-month EBITDA margin is 84.4% lower than the 35.59% industry average.
For the fiscal third quarter that ended on September 30, 2023, TRMLF’s total revenues from commodity sales and realized gains came in at $1.59 million. The company’s net earnings and net earnings per share stood at $274.69 thousand and $0.80, respectively.
For the quarter ending March 31, 2024, TRMLF’s revenue is expected to increase 0.9% year-over-year to $1.50 billion. Over the past nine months, the stock has declined marginally to close the last trading session at $40.13.
TRMLF’s bleak fundamentals are reflected in its POWR Ratings. It has an overall rating of C, which translates to a Neutral in our proprietary rating system.
Within the Foreign Oil & Gas industry, it is ranked #38 out of 43 stocks. It has a C grade for Momentum, Stability, and Sentiment. To see the other ratings of TRMLF for Growth, Value, and Quality, click here.
Suburban Propane Partners, L.P. (SPH)
SPH and its subsidiaries engage in the retail marketing and distribution of propane, renewable propane, fuel oil, and refined fuels in the United States. The company operates through four segments: Propane, Fuel Oil and Refined Fuels, Natural Gas and Electricity, and All Other.
On January 11, 2024, SPH becomes the official propane partner of the Anaheim Ducks and Honda Center for the 2023-24 NHL season, powering the team's Zamboni Ice Resurfacing Machine and pledging support to the Anaheim Ducks Foundation. The partnership extends SPH’s nationwide presence, emphasizing its commitment to sports, corporate, and charitable initiatives across 42 states.
In terms of the trailing-12-month Return on Common Equity, SPH’s 23.71% is 166.1% higher than the 8.91% industry average. Its 0.65x trailing-12-month asset turnover ratio is 192.1% higher than the 0.22x industry average.
On the other hand, its 8.66% trailing-12-month net income margin is 12.7% lower than the 9.92% industry average. Its 3.15% trailing-12-month Capex/Sales is 89.6% lower than the 30.31% industry average.
For the fourth quarter that ended September 30, 2023, SPH’s revenue came in at $226.60 million. Its operating income came in at $3.99 million, compared to an operating loss of $37.66 million in the year-ago quarter. Moreover, its adjusted EBITDA increased 7.3% year-over-year to $3 million.
Street expects SPH’s EPS and revenue for the quarter ending March 31, 2024, to increase 28.4% and 5.6% year-over-year to $2.08 and $556 million, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past six months, the stock has gained 37.6% to close the last trading session at $19.92.
SPH’s POWR Ratings reflect an uncertain outlook. It has an overall rating of C, equating to a Neutral in our proprietary rating system.
It is ranked last out of 2 stocks in the MLPs - Gas industry. It has a C grade for Value and Stability. Click here to see the other ratings of SPH for Growth, Momentum, Sentiment, and Quality.
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.
TRMLF shares were trading at $40.67 per share on Tuesday afternoon, up $0.54 (+1.34%). Year-to-date, TRMLF has declined -9.74%, versus a 3.60% 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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