Despite the rapid growth of solar and wind energy, the world's energy needs still heavily depend on fossil fuels, which maintain an 82% share of total primary energy consumption. The shift toward clean energy will require significant time, substantial investments, and the development of new technologies.
In the meantime, the oil and gas industry is expected to maintain its dominant position in the energy landscape for several decades to come. In this piece, I assessed two energy stocks, Energy Transfer LP (ET) and National Fuel Gas Company (NFG), to determine a better buy now.
Before examining the highlighted stocks, let's first explore the current developments within the oil and gas sector.
The International Energy Agency (IEA) has increased its projection for global oil demand growth in 2023 due to demand reaching "scaling record highs." With world oil demand having already surged to a record 103 million barrels per day in June and August, the IEA's monthly report suggests the potential for another peak in demand.
The IEA said, "For 2023 as a whole, global oil demand is set to expand by 2.2 million barrels per day to 102.2 million barrels per day." It added, "World oil demand is scaling record highs, boosted by strong summer air travel, increased oil use in power generation and surging Chinese petrochemical activity."
Meanwhile, the U.S. Energy Information Administration (EIA) predicts a 1.4 million barrels per day rise in 2023 in global liquid fuels production. Associated natural gas output is also set to average about 104 billion cubic feet per day (Bcf/d) until end-2024, compared to 103 billion cubic feet per day in the second quarter of 2023.
Furthermore, oil's crucial role in transportation and chemicals, amplified by rapid urbanization, is fortifying the industry. Amid higher costs and supply complexities, businesses are leveraging Operational Technology (OT) and industrial IoT for efficiency, which is driving further innovation and growth in the sector.
As a result, both ET and NFG are expected to benefit from the industry’s tailwinds.
NFG has gained 5.5% over the past month compared to ET’s 2.6% decline. Also, NFG has gained 3.2% over the past three months, compared to ET’s marginal rise during the same period. However, NFG has gained 17.8% over the past year, while ET has surged by 89.7% during the same time frame.
But which stock is a better buy now? Let’s find out.
Recent Developments
On March 27, ET announced a definitive agreement to acquire Lotus Midstream Operations for about $1.45 billion from an affiliate of EnCap Flatrock Midstream (EFM). Lotus’ Centurion Pipeline delivers all-encompassing midstream services through approximately 3,000 active pipeline miles, supporting 1.5 million daily barrels in the Permian’s key production zones.
The Centurion assets would bolster ET’s gathering capabilities from key producers while also enhancing access to downstream markets like Cushing, Midland, Colorado City, Wink, and Crane. Anchored by prominent producer clients with long-term contracts, these assets could ensure a stable source of demand and solidify ET’s market presence.
In its fiscal third quarter report, NFG announced the successful acquisition of three upstream assets spanning 36,000 net acres in the Eastern Development Area, contributing 16 million cubic feet per day in net production. The purchase, totaling $138.9 million, strengthens NF's E&P portfolio.
Additionally, the company has unveiled its fiscal 2024 earnings projection of $5.50 to $6.00 per share, marking an 11% increase from fiscal 2023 at the midpoint.
Recent Financial Results
For the fiscal second quarter that ended June 30, 2023, ET’s adjusted EBITDA from NGL and refined products transportation and services segment increased 9.7% year-over-year to $837 million. Similarly, adjusted EBITDA from the Crude oil transportation and services segment grew 19.9% from the year-ago value to $674 million.
In addition, as of June 30, 2023, the company’s current assets stood at $10.60 billion, while total assets amounted to $105.13 billion.
For the nine months that ended June 30, 2023, NFG’s cash inflow from operating activities increased 61.3% year-over-year to $1.07 billion. As of June 30, 2023, the company’s total assets stood at $8.11 billion, compared to $7.90 billion as of September 30, 2022.
However, NFG’s adjusted operating results and adjusted operating results per share decreased 6.4% and 6.6% year-over-year to $404.59 million and $4.38, respectively.
Past And Expected Financial Performance
Over the past three years, ET’s revenue increased at a CAGR of 20.5%. Its EBITDA and net income grew at respective CAGRs of 7.5% and 46.6%. Moreover, the company’s EPS and total assets increased at CAGRs of 34.6% and 3.1%, respectively, during the same period.
Analysts expect ET’s revenue to increase 4.7% year-over-year to $21.47 billion for the fiscal fourth quarter ending December 2023. Likewise, the company’s EPS for the same quarter is expected to rise 3.9% from the prior year’s period to $0.35.
NFG’s revenue increased at a CAGR of 13% over the past three years. Its EBITDA and net income grew at CAGRs of 16.9% and 101.1%, respectively. Furthermore, the company’s EPS and total assets rose at CAGRs of 97.1% and 4.4%, respectively, during the same time frame.
The consensus revenue estimate of $700.66 million for the fiscal 2024 first quarter ending December 2023 reflects a 6.3% year-over-year improvement. However, the consensus EPS estimate of $1.59 for the next quarter indicates a 13.7% decline from the previous year’s quarter.
Valuation
In terms of trailing-12-month Price/Sales, ET is currently trading at 0.48x, 78% lower than NFG, which is trading at 2.18x. Moreover, ET’s trailing-12-month EV/Sales multiple of 1.26 is 61.7% lower than NFG’s 3.29. Additionally, ET’s trailing-12-month Price/Cash Flow of 3.87x is 4.2% lower than NFG’s 4.04x.
Thus, ET is relatively affordable.
Profitability
ET’s trailing-12-month revenue is 36 times what NFG generates. Moreover, ET is more profitable, with a trailing-12-month levered FCF margin of 6.13% compared to NFG’s negative 24.19%.
Also, ET’s trailing-12-month cash from operations of $10.21 billion compares to NFG’s $1.21 billion. In addition, ET’s trailing-12-month asset turnover ratio of 0.76x compares to NFG’s 0.28x.
POWR Ratings
ET has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. Conversely, NFG has an overall rating of C, translating to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. ET has a B grade for Value in sync with its lower-than-industry valuation. In terms of forward P/E and Price/Sales, ET is trading at 8.76x and 0.46x, 15.7% and 69.4% lower than the respective industry averages of 10.39x and 1.50x.
On the other hand, NFG has a C grade for Value, justified by its mixed valuation. In terms of forward P/E, NFG is trading at 10.25x, 39% lower than the industry average of 16.80x. However, its forward Price/Sales of 2.13x is 9.7% higher than the 1.94x industry average.
Of the 88 stocks in the Energy - Oil & Gas industry, ET is ranked #18, while NFG is ranked #69.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, Sentiment, and Quality. Click here to view ET’s ratings. Get all NFG ratings here.
The Winner
The transition to clean energy demands time, investment, and innovation. In the meantime, the energy sector is expected to retain its energy dominance, with oil demand already reaching new heights.
Urbanization is also bolstering the industry's pivotal role in transport and chemicals. In addition, companies are utilizing operational technology and IoT for efficiency, fueling further innovation and sector growth.
Sound energy stocks ET and NFG are positioned to benefit from the industry’s promising growth prospects. However, considering NFG’s comparatively weaker financial performance, higher valuation, and relatively lesser probability, its competitor, ET, could be a better buy now.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy or Buy. View all the top-rated stocks in the Energy - Oil & Gas industry here.
What To Do Next?
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ET shares were trading at $12.82 per share on Wednesday afternoon, up $0.26 (+2.07%). Year-to-date, ET has gained 16.06%, versus a 16.31% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
Energy Transfer LP (ET) vs. National Fuel Gas Company (NFG): Which Energy Stock Has More Gas? StockNews.com
