Heightened geopolitical tensions in the Middle East, coupled with U.S. involvement, have triggered a surge in oil prices, marking the first significant increase since September of last year. Furthermore, solid oil demand forecasts from both OPEC and the International Energy Agency (IEA) are expected to drive oil prices higher.
Against the optimistic backdrop, owning the shares of three fundamentally sound energy companies, ChampionX Corporation (CHX), CVR Energy, Inc. (CVI), and Precision Drilling Corporation (PDS), could lead to potential gains.
However, before diving deeper into the fundamentals of the highlighted stocks, let’s first examine the factors that are shaping the industry’s prospects.
Despite the supply cuts by OPEC+, the impact of these production cuts has been mitigated partly due to huge crude oil production in the United States. According to the Energy Information Agency (EIA), crude oil production in the country is projected to reach 13.2 million barrels per day (bpd) in 2024 and over 13.4 million bpd in 2025, both of which would establish new records.
Moreover, the demand for oil will remain robust this year. The IEA anticipates that global oil consumption will surge by 1.24 million bpd in 2024, up 180,000 bpd from its previous projection, marking the third consecutive upward adjustment in its forecast. This upward trend is fueled by the improving global economic growth and the expanding petrochemicals sector in China.
In contrast, OPEC foresees a larger uptick in global oil demand, projecting a 2.25 million bpd increase for 2024, followed by an additional surge of 1.80 million bpd in 2025, largely driven by the strengthening Chinese economy.
Meanwhile, geopolitical tensions in the Middle East are escalating, with the United States and Iran edging closer to a potential direct confrontation. This underscores the heightened risk to crude supplies in the region. “The spreading conflict in the Middle East remains the most visible and growing risk for energy markets,” said Natasha Kaneva, head of global commodities research at JPMorgan.
Last month, oil prices experienced their first monthly surge since September 2023, driven by escalating tensions between the United States and Iran. U.S. crude and the global benchmark Brent both witnessed gains of 5.9% and 6.1%, respectively.
With the aforementioned factors converging to create a favorable industry outlook, buying the shares of CHX, CVI, and PDS might be beneficial for investors now. To that end, let’s now examine the fundamentals of the featured energy stocks in detail.
ChampionX Corporation (CHX)
CHX provides chemistry solutions, and engineered equipment and technologies to oil and gas companies worldwide. The company operates through four segments: Production Chemical Technologies; Production & Automation Technologies; Drilling Technologies; and Reservoir Chemical Technologies.
On February 5, 2024, CHX declared a quarterly dividend of $0.09, payable to its shareholders on April 5, 2024. This dividend reflects a 12% rise from the previous quarter’s dividend. The company’s annual dividend of $0.34 translates to a 1.29% yield on the prevailing price, while its four-year average dividend yield is 0.40%.
CHX’s trailing-12-month levered FCF margin of 13.05% is 114.5% higher than the industry average of 6.08%. Its trailing-12-month asset turnover ratio of 1.13x is 104.9% higher than the 0.55x industry average. Furthermore, the stock’s trailing-12-month cash per share of $1.46 is 57.9% higher than the 0.93x industry average.
For the fiscal fourth quarter, which ended on December 31, 2023, CHX’s revenue amounted to $943.56 million, while its income before income taxes rose 30.5% from the year-ago value to $113.93 million.
Meanwhile, the company’s net income and EPS came in at $78.16 million and $0.39, up 17.9% and 18.2% from the prior-year quarter, respectively. Also, during the same quarter, CHX’s cash and cash equivalents stood at $288.56 million, increasing 15.3% compared to $250.19 million as of December 31, 2022.
The consensus EPS estimate of $0.41 for the fiscal 2024 first quarter (ending March 2024) represents a 14.6% year-over-year rise. While the consensus revenue estimate for the ongoing quarter stands at $921.95 million. Additionally, the company has an excellent earnings surprise history, surpassing the EPS estimates in three of the trailing four quarters.
The stock gained marginally intraday to close the last trading session at $26.57.
CHX’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Momentum and Quality. In the 51-stock Energy - Services industry, it is ranked #8. Click here to see CHX’s ratings for Growth, Value, Stability, and Sentiment.
CVR Energy, Inc. (CVI)
CVI engages in the petroleum refining and nitrogen fertilizer manufacturing activities in the United States. It operates in two segments, Petroleum and Nitrogen Fertilizer. The Petroleum segment refines and markets products, while the Nitrogen Fertilizer segment produces nitrogen fertilizers in North America.
On November 20, 2023, CVI paid its shareholders a quarterly cash dividend of $0.50 per share. The company’s annual dividend translates to a 5.96% yield on the prevailing price, while its four-year average dividend yield is 13.75%. Its dividend payouts have grown at a CAGR of 23.1% over the past three years.
CVI’s trailing-12-month Return On Common Equity (ROCE) of 104.15% is 438.1% higher than the industry average of 19.35%. Its trailing-12-month asset turnover ratio of 2.25x is 308.2% higher than the 0.55x industry average. Furthermore, the stock’s trailing-12-month cash per share of $8.84 is 855.4% higher than the 0.93x industry average.
For the fiscal third quarter, which ended on September 30, 2023, CVI’s net sales amounted to $2.52 billion, while its operating income rose 332% from the year-ago value to $445 million. Its adjusted EBITDA remained flat year-over-year at $313 million.
In addition, the company’s net income came in at $354 million, up 342.5% from the prior-year quarter. During the same period, its cash and cash equivalents stood at $889 million, increasing 74.3% compared to $510 million as of December 31, 2022.
Analysts predict CVI’s revenue and EPS for the fiscal fourth quarter (ended December 2023) to come in at $2.26 billion and $0.34, respectively. Moreover, the company surpassed its revenue and EPS estimates in three of the trailing four quarters, which is impressive.
CVI’s shares have climbed 9% over the past month to close the last trading session at $33.96.
CVI’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has an A grade for Quality and a B for Value and Momentum. Within the 82-stock Energy - Oil & Gas industry, it is ranked #8. Click here to see the other ratings of CVI for Growth, Stability, and Sentiment.
Precision Drilling Corporation (PDS)
Headquartered in Calgary, Canada, PDS is a drilling company which provides onshore drilling, completion, and production services to exploration and production companies in the oil and natural gas and geothermal industries in North America and the Middle East. The company operates in two segments: Contract Drilling Services; and Completion and Production Services.
On November 8, 2023, PDS successfully concluded the acquisition of CWC Energy Services Corp for C$127 million ($94.05 million). CWC’s total consideration included 947,807 PDS common shares, approximately C$14 million ($10.38 million) cash, and the undertaking of CWC’s net debt of roughly C$38 million ($28.14 million), excluding transaction costs.
This acquisition strengthens PDS' standing by expanding its fleet to include 72 active service rigs in Canada, along with 73 active drilling rigs in Canada and 51 active drilling rigs in the U.S.
PDS’ President and CEO, Kevin Neveu, highlighted that this strategic acquisition positions PDS as the premier well service provider in Canada while bolstering its drilling operations in both Canada and the United States. With the anticipated synergies, the company expects the transaction to contribute positively to cash flow per share in 2024 and to support its ongoing deleveraging efforts.
PDS’ trailing-12-month levered FCF margin of 14.46% is 137.9% higher than the industry average of 6.08%. Its trailing-12-month asset turnover ratio of 0.68x is 22.6% higher than the 0.55x industry average. Furthermore, the stock’s trailing-12-month cash per share of $2.65 is 186.8% higher than the $0.93 industry average.
In the fiscal third quarter, which ended on September 30, 2023, PDS’ revenue increased 4.1% year-over-year to C$446.75 million ($330.84 million), while adjusted EBITDA stood at C$114.58 million ($84.85 million).
Furthermore, during the same quarter, the company’s net earnings and net earnings per share came at C$19.79 million ($14.66 million) and C$1.45, respectively. Also, its total current assets stood at C$477.40 million ($353.53 million), up 1.4% compared to C$470.67 million ($348.55 million) as of December 31, 2022.
Street expects PDS’ EPS for the fiscal fourth quarter (ended December 2023) to increase 610.7% year-over-year to $1.43, while its revenue for the same quarter is projected to come in at $357.82 million. Moreover, the company topped its revenue estimates in three of the trailing four quarters, which is promising.
Over the past month, PDS’ shares have surged 12.5% to close the last trading session at $58.96.
It’s no surprise that PDS has an overall rating of B, which equates to Buy in our proprietary rating system. It has a B grade for Growth, Value, and Momentum. Out of 15 stocks in the Energy - Drilling industry, it is ranked first.
In addition to the POWR Ratings we’ve stated above, we also have PDS’ ratings for Stability, Sentiment, and Quality. Get all PDS ratings here.
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.
CHX shares were trading at $29.22 per share on Tuesday afternoon, up $2.65 (+9.97%). Year-to-date, CHX has gained 0.33%, versus a 3.64% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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