Despite widespread pledges to transition toward cleaner energy sources, the traditional energy sector continues to see a promising future ahead, aided by rising oil demand in emerging nations, escalating geopolitical tensions, and supply constraints.
Against the backdrop, three fundamentally sound energy stocks, Energy Transfer LP (ET), Western Midstream Partners, LP (WES), and DNOW Inc. (DNOW), could be ideal portfolio additions.
However, before delving deeper into the fundamentals of the highlighted stocks, let’s take a peek at the factors shaping the industry’s prospects.
OPEC forecasts oil demand to increase by 2.25 million barrels per day (bpd) this year, gradually tapering to a still-strong 1.80 million bpd by 2025. Additionally, next year's oil demand growth is expected to be primarily driven by a nearly 1.70 million bpd increase in non-OECD countries, particularly in China, the Middle East, and India.
Meanwhile, on the supply side, OPEC has been implementing measures to bolster prices through supply cuts. The oil cartel has consistently reduced its output in an endeavor to stabilize global crude prices and has pledged to further cut production by 2.20 million bpd till the ongoing quarter.
In addition to OPEC’s efforts to boost prices through supply cuts, the recent forecast from the U.S. Energy Information Administration (EIA) paints a picture of dwindling domestic oil growth for 2024. The projection suggests a decrease of 120,000 bpd to 170,000 bpd, marking a stark contrast to last year's remarkable surge of 1.02 million bpd.
Furthermore, oil prices surged yesterday in the wake of escalating geopolitical tensions triggered by the U.S. attack on the militant group Hezbollah in Baghdad and Israel Prime Minister Benjamin Netanyahu's rejection of Hamas' ceasefire proposal.
Following these two major geopolitical developments, Brent futures rallied 3% to reach $81.36 per barrel, and West Texas Intermediate (WTI) crude surged by 3.2%, settling at $76.22 per barrel. This significant uptick saw Brent breaching $80 per barrel and WTI reaching above $75 per barrel for the first time this month.
With the persistent reliance on oil, coupled with the imbalance between supply and demand, along with escalating geopolitical tensions, companies in the energy sector are well-positioned for success. Thus, investing in the shares of ET, WES, and DNOW might be beneficial. To that end, let’s now explore the fundamentals of the featured energy stocks in detail:
Energy Transfer LP (ET)
ET provides energy-related services. The company is also engaged in selling natural gas to electric utilities, independent power plants, local distribution and other marketing companies, and industrial end-users.
On January 25, 2024, ET declared a quarterly distribution of $0.32 per common unit, payable to its unitholders on February 20, 2024. The company’s annual dividend of $1.26 translates to a 9.06% yield on the prevailing price level, while its four-year average dividend yield is 10.26%. Its dividend payouts have grown at a CAGR of 10.8% over the past three years.
On November 3, 2023, ET successfully completed its merger with Crestwood Equity Partners LP, solidifying its dominant position in the midstream sector. The acquisition expands ET’s ownership of pipelines and assets to over 125,000 miles across 41 states, bolstering its presence in major U.S. regions.
The transaction boosts ET’s distributable cash flow per unit, bringing in substantial cash flows from long-term contracts and acreage dedications. The integration of the two companies is projected to yield annual run-rate cost and efficiency synergies of at least $40 million, with additional financial and commercial benefits anticipated.
Meanwhile, in terms of the trailing-12-month asset turnover ratio, the stock’s 0.74x is 34.3% higher than the 0.55x industry average.
For the fiscal third quarter, which ended on September 30, 2023, ET’s revenues amounted to $20.74 billion, while its operating income rose 13.2% from the prior-year quarter to $2.23 billion. During the same quarter, the company’s net income came in at $1.05 billion and $0.15 per share. In addition, its adjusted EBITDA improved 14.7% from the year-ago value to $3.54 billion.
Analysts predict ET’s revenue and EPS for the fourth quarter (ended December 2023) to increase 4.9% and 1.3% year-over-year to $21.50 billion and $0.34, respectively.
ET’s shares have surged 12.5% over the past nine months to close the last trading session at $13.91.
ET’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 Value and Momentum. In the 82-stock Energy - Oil & Gas industry, it is ranked #8. Click here to see ET’s ratings for Growth, Stability, Sentiment, and Quality.
Western Midstream Partners, LP (WES)
WES operates as a midstream energy company primarily in the United States. It is involved in gathering, compressing, treating, processing, and transporting natural gas, natural gas liquids, and crude oil.
On January 22, 2024, WES declared a quarterly distribution of $0.58 per unit, payable to its unitholders on February 13, 2024. The company’s annual dividend of $2.30 translates to an 8.21% yield on the prevailing price level, while its four-year average dividend yield is 11.20%. Its dividend payouts have grown at a CAGR of 21.2% over the past three years.
WES’ trailing-12-month net income margin of 34.53% is 175.9% higher than the industry average of 12.51%. Its trailing-12-month EBIT margin of 41.02% is 93.1% higher than the 21.24% industry average. Furthermore, the stock’s trailing-12-month levered FCF margin of 15.90% is 176.8% higher than the 5.74% industry average.
For the fiscal third quarter, which ended on September 30, 2023, WES’ total revenues and other income came in at $776.01 million. Its operating income rose 1% year-over-year to $360.76 million. Moreover, the company’s net income and net income per unit increased 3.9% and 6.1% from the prior-year quarter to $284.39 million and $0.70, respectively.
Street expects WES’ revenue for the fourth quarter (ended December 2023) to increase 9.7% year-over-year to $855.24 million. While its EPS for the same quarter is projected to come in at $0.79. Furthermore, its EPS is forecasted to improve by 3.8% annually over the next five years.
Over the past nine months, the stock has climbed 9.4% to close the last trading session at $27.97.
WES’ 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 Momentum and Stability. Within the A-rated 25 stock MLPs - Oil & Gas industry, it is ranked #7. Click here to see the other ratings of WES for Growth, Value, and Sentiment.
DNOW Inc. (DNOW)
DNOW distributes downstream energy and industrial products for petroleum refining, chemical processing, LNG terminals, power generation utilities, and industrial manufacturing operations in the United States, Canada, and internationally.
DNOW’s trailing-12-month Return On Total Capital (ROTC) of 11.20% is 63.9% higher than the industry average of 6.83%. Its trailing-12-month Return On Total Assets (ROTA) of 9.59% is 95.8% higher than the 4.90% industry average. Furthermore, the stock’s trailing-12-month asset turnover ratio of 1.74x is 115.8% higher than the 0.81x industry average.
For the fiscal third quarter, which ended on September 30, 203, DNOW’s revenue increased 1.9% from the year-ago value to $588 million, while its operating profit came in at $37 million.
During the same quarter, the company reported a net income and EPS of $35 million and $0.32, respectively. Also, its total assets stood at $1.38 billion, increasing 4.2% compared to $1.30 billion as of December 31, 2022.
Analysts expect DNOW’s revenue for the fiscal year ended December 2023 to increase 8% year-over-year to $2.31 billion. While its EPS for the same period is projected to come in at $0.92. Moreover, the company topped its revenue and EPS estimates in three of the trailing four quarters, which is impressive.
The stock has gained 3.4% over the past nine months to close the last trading session at $9.78.
It’s no surprise that DNOW has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Value and a B for Momentum. Out of 51 stocks in the Energy - Services industry, it is ranked #7.
In addition to the POWR Ratings we’ve stated above, we also have DNOW ratings for Growth, Stability, Sentiment, and Quality. Get all DNOW 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.
ET shares were trading at $13.90 per share on Friday afternoon, down $0.01 (-0.07%). Year-to-date, ET has gained 2.99%, versus a 5.18% 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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