As a result of robust global demand for oil and gas and tight supplies aggravated by geopolitical instability, oil prices could march upward in the near term, thereby benefiting energy companies. Hence, it could be wise to invest in the fundamentally sound energy stock Koninklijke Vopak N.V. (VOPKY) for potential gains.
However, investors could wait for better entry points in USA Compression Partners, LP (USAC) and Solaris Oilfield Infrastructure, Inc. (SOI).
OPEC stuck to its forecast for relatively solid growth in global oil demand this year and said 2025 will witness a robust surge in oil use, driven by China and the Middle East, in a surprise early prediction. OPEC is highly upbeat on global oil demand growth due to strong economic forecasts. In 2025, the group expects an increase in global economic growth to 2.8% from 2.6% this year.
In its monthly report, the producer group said world oil demand will rise by 2.25 million barrels per day (bpd) in 2024 and 1.85 million bpd in 2025. OPEC noted that global oil demand growth is forecast to outpace the anticipated increase in non-OPEC supply over the next two years.
Oil and gas prices could surge in the near future amid solid energy demand and growing supply risks amid escalating tensions across the Middle East and ongoing attacks on Red Sea shipping. Crude oil futures yesterday breached the $80/b mark as fresh strikes on Houthi-controlled areas raise conflict concerns.
Moreover, Saudi Arabia, Russia, and other OPEC+ countries agreed to voluntary output cuts totaling about 2.2 million b/d for the first quarter of this year in an attempt to boost the oil market sentiment.
In its Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) forecasts the Brent crude oil price to average $82 per barrel in 2024 and $79 next year, close to last year’s average of $82 a barrel.
Against a backdrop of surging oil prices, J.P. Morgan Research believes energy stocks would outperform the broader equities market.
“We are turning bullish now as we envisage an emerging supply-demand gap beyond 2025, coupled with strengthening bottom-up sector fundamentals,” said Christyan Malek, Global Head of Energy Strategy and Head of EMEA Oil & Gas Equity Research at J.P. Morgan.
J.P. Morgan expects the world oil demand to reach 106.9 mbd by 2030, up 5.5 mbd from 2023 levels. This oil demand growth is underpinned by population growth and rising energy consumption.
Given the high demand for oil and gas, energy companies offering services in drilling, evaluation, production, and maintenance are likely to benefit considerably. The global oilfield services market is expected to grow at a CAGR of 5.6%, reaching $421.31 billion by 2030.
Given the industry’s bright prospects, investing in fundamentally strong energy stock VOPKY could be wise for solid returns. However, it seems prudent to wait for better entry points in USAC and SOI.
Let’s discuss the fundamentals of these stocks in detail:
Stocks to Hold:
USA Compression Partners, LP (USAC)
USAC is a leading provider of natural gas compression services. Its broad customer base comprises oil companies and independent producers, processors, and transporters of natural gas and crude oil. It mainly focuses on providing natural gas compression services to infrastructure applications like centralized natural gas gathering systems and processing facilities.
On January 11, 2024, USAC announced a cash distribution of $0.525 per common unit (or $2.10 on an annualized basis) for the fourth quarter of 2023. The distribution will be paid on February 2, 2024, to unitholders of record as of the close of business on January 22, 2024.
USAC pays an annual dividend of $2.10, which translates to a yield of 8.18% at the current share price. Its four-year average dividend yield is 13.81%.
USAC’s trailing-12-month gross profit margin and EBIT margin of 66.24% and 26.86% are higher than the industry averages of 46.22% and 21.30%, respectively. However, its trailing-12-month net income margin of 7.86% is 40.8% lower than the 13.28% industry average.
In terms of forward EV/Sales, USAC is trading at 6.27x, 222.9% higher than the industry average of 1.94x. Also, the stock’s forward Price/Sales of 3x is 125.1% higher than the industry average of 1.33x.
In the third quarter that ended September 30, 2023, USAC’s total revenues increased 20.9% year-over-year to $217.09 million. Its adjusted gross margin came in at $142.16 million, up 18.3% year-over-year. Net income attributable to common unitholders’ interest was $8.71 million, compared to a loss of $2.58 million in the previous year’s period.
In addition, the company’s adjusted EBITDA increased 19.2% from the year-ago value to $130.16 million. Its distributable cash flow came in at $71.57 million, up 29.7% year-over-year.
As per updated full-year 2023 guidance, USAC expects net income to be between $73 million and $83 million. The company’s adjusted EBITDA is expected to be in the range of $500 million to $510 million. Also, its distributable cash flow will be in the range of $270-$280 million.
Analysts expect the company’s revenue and EPS for the fiscal year (ending December 2024) to grow 8.4% and 87.8% year-over-year to $912.80 million and $0.55, respectively. Also, USAC topped consensus revenue estimates in each of the trailing four quarters.
USAC’s stock has gained 30.6% over the past six months and 27.1% over the past year to close the last trading session at $25.68.
USAC’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, which translates to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
USAC has an A grade for Growth and a B for Momentum. However, the stock has an F grade for Value. It has ranked #18 out of 26 stocks in the A-rated MLPs - Oil & Gas industry.
To see the other ratings of USAC for Sentiment, Quality, and Stability, click here.
Solaris Oilfield Infrastructure, Inc. (SOI)
SOI engages in the designing and manufacturing of mobile proppant management systems that are used to unload, store, and deliver proppant, water, and chemicals at oil and natural gas well sites. It develops Railtronix, an inventory management software. Also, it offers AutoBlend, an integrated electric blender; fluid management systems; and proprietary Solaris Lens software.
On December 11, 2023, SOI paid a quarterly dividend of $0.12 per share, which represents a 9% per-share increase from the third quarter of 2023 and the company’s third raise since initiating the dividend in 2018. The fourth quarter 2023 dividend will be Solaris’ 21st consecutive quarterly dividend.
SOI’s trailing-12-month gross profit margin and EBITDA margin of 37.14% and 28.85% are lower than the industry averages of 46.22% and 35.10%, respectively. But the stock’s trailing-12-month ROTC of 9.86% is 6.2% higher than the industry average of 9.28%.
In terms of forward non-GAAP P/E, SOI is trading at 7.99x, 17% lower than the industry average of 9.62x. Likewise, the stock’s forward EV/Sales and Price/Sales multiples of 1.31 and 0.77 are 32.5% and 42.5% lower than the industry averages of 1.94 and 1.33, respectively.
For nine months that ended September 30, 2023, SOI’s total revenue decreased 2.7% year-over-year to $229.60 million. But its operating income rose 28.2% from the year-ago value to $40.66 million. Net income attributable to Solaris grew 22.5% from the prior year’s period to $20.04 million. The company’s earnings per share of Class A common stock was $0.64, up 30.6% year-over-year.
However, as of September 30, 2023, the company’s cash and equivalents were $3.45 million, compared to $8.84 million as of December 31, 2022. Its total liabilities increased to $167.78 million versus $145.45 million as of December 31, 2022.
Street expects SOI’s EPS for the fiscal year (ended December 2023) to increase 22.3% year-over-year to $0.93. But the company’s revenue for the current year is expected to decline 7.5% year-over-year to $296.11 million. Also, SOI has missed the consensus revenue estimates in three of the trailing four quarters.
SOI’s stock has gained 11.4% over the past five days to close the last trading session at $7.42. However, the stock has declined 10.8% over the past month.
SOI’s POWR Ratings reflect this mixed outlook. The stock has an overall rating of C, which translates to a Neutral in our proprietary rating system.
The stock has a C grade for Quality, Growth, and Stability. SOI is ranked #13 out of 52 stocks in the Energy - Services industry.
In addition to the POWR Ratings I’ve just highlighted, you can see SOI’s ratings for Value, Momentum, and Sentiment here.
Stock to Buy:
Koninklijke Vopak N.V. (VOPKY)
Headquartered in Rotterdam, the Netherlands, VOPKY is an independent tank storage company that stores and manages liquid chemicals, gases, and oil products globally. The company operates terminals equipped with storage tanks, jetties, truck and rail loading stations, and pipelines, facilitating comprehensive access to road, rail, and pipeline networks.
On November 21, VOPKY and IHI Corporation signed a Memorandum of Understanding (MoU) to explore jointly the development and operation of efficient, high-value-added ammonia terminals in Japan. Ammonia plays a vital role as a fuel for reducing carbon emissions from thermal power generation and as a hydrogen carrier.
The synergies between VOPKY and IHI will create innovative solutions to accelerate the development of new supply chains for energy and feedstocks, thereby fostering gains in the sustainable energy sector.
On August 23, VOPKY, with Gate Terminal and with shareholders, Gasunie announced the final investment decision for expanding Gate Terminal’s storage and regasification capacity. The expansion includes a new 180,000 cubic meters LNG storage tank and additional regasification capacity of 4 BCM per year.
Vopak and Gasunie are the founders and owners of Gate Terminal in Rotterdam, which has been operational since 2011. This final investment aligns with VOPKY’s strategy to grow in LNG infrastructure.
VOPKY’s trailing-12-month gross profit margin of 95.76% is 107.2% higher than the industry average of 46.22%. In addition, the stock’s trailing-12-month EBITDA margin and net income margin of 50.24% and 31.51% are higher than the industry averages of 35.10% and 13.28%, respectively.
VOPKY’s revenues increased 1% year-over-year to €352 million ($382.60 million) for the third quarter of 2023. Its EBITDA grew 6% from the year-ago value to €240.50 million ($261.41 million). The company’s net profit attributable to holders of ordinary shares and EPS grew 25.2% and 24.2% year-over-year to €97.30 million ($105.76 million) and €0.77, respectively.
Street expects VOPKY’s revenue to increase 5.3% year-over-year to $1.54 billion for the fiscal year that ended December 2023. The stock has gained 2.5% over the past month and 8.4% over the past year to close the last trading session at $32.64.
VOPKY’s solid prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
VOPKY has an A grade for Stability and a B for Momentum and Growth. It is ranked #8 of 43 stocks in the B-rated Foreign Oil & Gas industry.
Click here to access the additional VOPKY ratings (Value, 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.
VOPKY shares were unchanged in premarket trading Wednesday. Year-to-date, VOPKY has declined -2.94%, versus a 2.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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