In this piece, I evaluated two energy stocks, Energy Transfer LP (ET) and Marathon Oil Corporation (MRO), to determine a better investment. I find ET a better pick for the reasons explained throughout this article.
Despite the shift to renewable energy sources, traditional sources of energy such as oil and gas will continue to witness solid demand in the long term due to rising energy needs, growth in population, rapid industrialization, etc. The oil and gas industry looks set for a solid recovery this year due to the ongoing geopolitical tensions in the Middle East and fears of supply outstripping demand due to supply restrictions by OPEC+.
Crude oil prices are set to post their second consecutive monthly gain after a period of losses last year. Oil prices are likely to get a boost due to hostilities in the Middle East, the expected extension of supply cuts by OPEC+ into the second quarter, and hopes of a sustained recovery in Chinese oil demand after a travel boom was witnessed over the Lunar New Year holiday period.
The OPEC+ is likely to consider extending voluntary oil output cuts into the second quarter to support oil prices. Two of the OPEC+ sources said that the group could keep these voluntary oil output cuts in place until the end of the year. The Red Sea has become a no-go zone following the regular attacks on shipping vessels by the Iran-backed Houthis.
The missile and drone attacks by the Houthis have driven up the costs of transporting energy products and have tightened supplies. The outlook for oil prices looked negative due to demand concerns in China.
However, China, which is the biggest oil consumer in the world, recently reported positive economic data where domestic tourism showed signs of solid recovery as spending rose 47.3% year-over-year to ¥632.70 billion ($87.88 billion). Moreover, the Chinese government is undertaking several measures to boost its fragile economy. Such measures are expected to stimulate oil demand.
The expected interest rate cuts by the Federal Reserve this year could boost demand for consumables, especially crude oil. Furthermore, Russian authorities announced a six-month ban on gasoline exports from March 1 to compensate for rising demand and refinery maintenance.
OPEC predicts a 2.25 million barrels per day (bpd) increase in world oil demand for 2024 and a 1.85 million bpd rise in 2025. In its monthly report, the IEA expects global oil demand to grow by 1.22 million bpd this year. Meanwhile, the long-term outlook for oil remains positive, with J.P. Morgan Research forecasting world oil demand to reach 106.9 mbd by 2030.
Given the favorable industry outlook, both ET and MRO should benefit. However, in terms of price performance, ET is the clear winner. ET’s stock has gained 8.4% over the past six months, compared to MRO’s 6.9% decline. In addition, ET’s stock has gained 6.3% over the three months, compared to MRO’s 4.7% decline.
Here are the reasons I think ET could perform better in the near term:
Recent Financial Results
For the fiscal fourth quarter that ended December 31, 2023, ET’s revenues rose marginally year-over-year to $20.53 billion. Its operating income rose 19.9% year-over-year to $2.17 billion.
For the same quarter, the company’s net income attributable to partners and net income per common unit came in at $1.33 billion and $0.37, respectively, up 14.9% and 8.8% over the prior-year quarter. In addition, its adjusted EBITDA increased 4.8% year-over-year to $3.60 billion.
On the other hand, MRO’s total revenue and other income for the fiscal fourth quarter ended December 31, 2023, declined 2.4% year-over-year to $1.69 billion. Its income from operations declined 30.5% from the year-ago value to $520 million. Also, the company’s adjusted net income came in at $406 million and $0.69 per share, down 27.9% and 21.6% over the prior-year quarter, respectively.
Expected Financial Performance
ET’s revenue has improved at a 7.8% CAGR over the past five years. For fiscal 2024, ET’s EPS and revenue are expected to increase 47.7% and 13.5% year-over-year to $1.61 and $89.17 billion, respectively. Its EPS for fiscal 2025 is expected to increase 4% year-over-year to $1.67, while its revenue for fiscal 2025 is expected to decrease 2.5% year-over-year to $86.96 billion.
MRO’s revenue has grown at a CAGR of 1.3% over the past five years. Analysts expect MRO’s EPS and revenue for fiscal 2024 to decline 1.5% and 2.3% year-over-year, $2.57 and $6.54 billion, respectively. Its EPS and revenue for fiscal 2025 are expected to increase 25.9% and 5.8% year-over-year to $3.24 and $6.92 billion, respectively.
Profitability
ET’s trailing-12-month revenue is 12.18 times what MRO generates. MRO is more profitable, with an EBITDA margin and net income margin of 66.84% and 24.08%, compared to ET’s 16.15% and 5%, respectively. Also, MRO’s trailing-12-month gross profit margin of 76.49% is higher than ET’s 17.56%.
Valuation
In terms of the forward non-GAAP PEG, MRO’s 2.36x is 85.8% higher than ET’s 1.27x. Likewise, MRO’s forward EV/Sales ratio of 2.97x is 126.7% higher than ET’s 1.31x.
Thus, ET is relatively more affordable.
POWR Ratings
ET has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, MRO has an overall rating of C, translating to a 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 discounted valuation. MRO’s mixed valuation justifies its C grade for Value.
ET’s stock is trading above its 50-day and 200-day moving averages, consistent with its B grade for Momentum. On the other hand, MRO’s stock is trading above its 50-day moving average but below its 200-day moving average, justifying its C grade for Momentum.
ET has a C grade for Quality, in sync with its mixed profitability., On the other hand, MRO’s high profitability justifies its B grade for Quality.
Of the 83 stocks in the Energy – Oil & Gas industry, ET is ranked #2, while MRO is ranked #43 in the same industry.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Stability, Sentiment, and Quality. Get all the ratings of ET here. Click here to view MRO’s ratings.
The Winner
Positive economic data from China and the corrective measures taken by the Chinese authorities to boost its economy could boost demand for oil. Moreover, the expected interest rates by the Fed could also drive-up demand for oil.
Meanwhile, the expected extension of supply cuts by OPEC+ into the second quarter and the attacks on shipping vessels by the Houthis on the Red Sea could keep oil supply restricted, thereby boosting oil prices this year.
With the long-term demand for oil and gas looking solid, companies like ET and MRO are in an excellent position to gain. Considering ET's more robust financial position, optimistic analyst estimates, and appealing valuation, it could be a better investment choice than MRO.
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.
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ET shares were trading at $14.61 per share on Thursday morning, up $0.08 (+0.55%). Year-to-date, ET has gained 8.25%, versus a 6.39% 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.
MRO vs. ET - Which Energy Stock Has More Growth Potential? StockNews.com
