Tighter supplies amid extended oil output cuts by Saudi and Russia and soaring demand worldwide will likely cause oil and gas prices to rise this year and beyond, creating strong tailwinds for the energy sector. Given the industry’s solid prospects, it could be wise to invest in fundamentally sound energy stock Shell plc (SHEL).
However, investors could hold Par Pacific Holdings, Inc. (PARR) and wait for a better entry point in this stock while avoiding struggling Devon Energy Corporation (DVN) seems prudent.
Before delving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the energy sector’s outlook.
This Tuesday, the Organization of the Petroleum Exporting Countries (OPEC) stuck to its forecasts for solid growth in global oil demand in 2023 and 2024, citing signs that major economies are faring better than expected despite several headwinds like rising interest rates and high inflation.
In its monthly report, OPEC said that world oil demand will rise by 2.44 million barrels per day (bpd) this year. A lifting of COVID-19 lockdowns in China will primarily contribute to oil demand growth in 2023. Further, the organization has maintained a relatively upbeat view in 2024, expecting another “healthy” 2.25 million bpd growth.
“The ongoing global economic growth is forecast to drive oil demand, especially given the recovery in tourism, air travel and steady driving mobility,” OPEC stated in the report. “Pre-COVID-19 levels of total global oil demand will be surpassed in 2023.”
OPEC and its allies, known as OPEC+, began restricting oil supply last year to boost the market. This month, benchmark Brent crude breached $90 per barrel for the first time since November 16, 2022, after the world’s biggest crude exporters, Saudi Arabia and Russia, extended their combined 1.3 million bpd until the end of this year.
Moreover, the Energy Information Administration (EIA) expects world oil inventories to plunge by nearly a half million bpd in the second half of 2023, causing oil prices to rise over the remainder of the year.
In its September Short-Term Energy Outlook (STEO), EIA forecasts the Brent crude oil price will average $93 per barrel in the fourth quarter of this year, an increase from its August forecast of less than $88 a barrel.
“With the production cut extended, we anticipate a market deficit of more than 1.5 million barrels per day in 4Q23,” UBS analyst Giovanni Staunovo wrote in a note to clients. UBS anticipates Brent crude to surge to $95 a barrel and the U.S. WTI benchmark to rise to $91 per barrel by year-end.
Goldman Sachs also warns that production cuts by Russia and Saudi could send oil prices above $100 per barrel by the end of 2024.
Considering these conducive trends, let’s take a look at the fundamentals of the three Energy - Oil & Gas stocks, starting with number 3.
Stock to Sell:
Stock #3: Devon Energy Corporation (DVN)
DVN is an independent energy company. It explores, develops, and produces oil, natural gas, and natural gas liquids (NGLs) across the U.S. The company operates in Delaware, Anadarko, Williston, Eagle Ford, and Powder River Basin.
In terms of forward Price/Sales, DVN is trading at 2.24x, 41.9% higher than the industry average of 1.58x. Likewise, the stock’s forward Price/Book multiple of 2.76 is 64.3% higher than the industry average of 1.68.
For the second quarter that ended June 30, 2023, DVN’s total revenues decreased 38.6% year-over-year to $3.45 billion, while its oil, gas and NGL sales were $2.49 billion, down 39.2% over the prior year’s quarter. The company’s earnings before income taxes declined 64% from the year-ago value to $897 million.
In addition, the company’s net earnings came in at $698 million or $ 1.07 per share, down 64% and 63.5% year-over-year, respectively. Also, its cash, cash equivalents and restricted cash stood at $488 million as of June 30. 2023, compared to $1.45 billion as of December 31, 2022.
Analysts expect DVN’s revenue for the fiscal year (ending December 2023) to decline 24.4% year-over-year to $14.49 billion. The company’s EPS for the ongoing year is expected to decrease 32.4% from the prior year to $5.62.
DVN’s stock has plunged 10.7% year-to-date and 23.5% over the past year to close the last trading session at $50.36.
DVN’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has a D grade for Growth and Stability. It is ranked #77 out of 87 stocks in the Energy - Oil & Gas industry.
Click here to access the other ratings of DVN for Growth and Momentum.
Stock to Hold:
Stock #2: Par Pacific Holdings, Inc. (PARR)
PARR owns and operates energy, infrastructure, and retail businesses. The company operates through three segments: Refining; Retail; and Logistics. PARR’s strategy is to acquire and develop downstream energy businesses in logistically complex, niche markets.
On June 1, PARR announced its acquisition of the Billings refinery and related marketing and logistics assets from Exxon Mobil Corporation (XOM) and two of its subsidiaries. With this acquisition, PARR expects to significantly enhance its scale and geographic diversification while positively impacting its earnings and cash flows.
On April 27, PARR announced its plans to invest around $90 million in establishing Hawaii’s largest liquid renewable fuels manufacturing facility at its Kapolei refinery. This project represents a key milestone in the company’s renewable fuels strategy.
The project, expected to be commissioned in 2025, would produce up to 60% sustainable aviation fuel (SAF) by leveraging the expertise and experience of the refinery’s operating team, existing tank storage, and related logistics. In total, the facility is expected to produce nearly 61 million gallons per year of renewable diesel, SAF, renewable naphtha, and LPGs.
For the six months that ended June 30, 2023, PARR’s revenues increased 0.4% year-over-year to $3.47 billion. Its adjusted EBITDA grew 25.1% from the year-ago value to $318.47 million. Also, the company’s adjusted net income and adjusted net income per common share were $243.09 million and $3.98, increases of 43.1% and 39.6% year-over-year, respectively.
PARR’s trailing-12-month gross profit and EBITDA margins of 17.09% and 11.08% are 64.5% and 72.1% lower than the respective industry averages of 48.09% and 39.65%. However, its trailing-12-month ROTC and ROTA of 29.62% and 17.18% are higher than the industry averages of 10.60% and 8.06%, respectively.
Analysts expect PARR’s revenue for the fourth quarter (ending December 2023) to increase 7.8% year-over-year to $1.95 billion. But, the consensus EPS estimate of $1.24 for the same period indicated a decline of 43.8% year-over-year.
Furthermore, for the fiscal year 2024, the company’s revenue and EPS are expected to decrease by 3.4% and 48.2% from the previous year to $7.31 billion and $4.27, respectively.
Shares of PARR gained 32.3% over the past six months and 95.9% over the past year to close the last trading session at $34.97.
PARR’s POWR Ratings reflect this mixed outlook. The stock has an overall C rating, which translates to a Neutral in our proprietary rating system.
PARR has a B grade for Momentum and Value. It has a C grade for Sentiment and Quality. It is ranked #18 of 87 stocks in the Energy - Oil & Gas industry.
Beyond what we stated above, we also have PARR’s ratings for Growth and Stability. Get all PARR ratings here.
Stock to Buy:
Stock #1: Shell plc (SHEL)
SHEL is a global energy and petrochemical company headquartered in London, the United Kingdom. It operates through Integrated Gas; Upstream; Marketing; Chemicals and Products; and Renewables and Energy Solutions segments. The company explores, produces, refines, and markets oil and natural gas. It also manufactures and sells chemicals.
On July 27, SHEL commenced a $3 billion share buyback program covering an aggregate contract term of nearly three months. The maximum number of ordinary shares that may be purchased or committed to be purchased by the company under the program is 692,000,000. The program’s purpose is to reduce the company’s issued share capital.
On April 18, SHEL’s subsidiary, Shell U.K. Ltd, reinitiated operations at the Pierce field in the U.K. Central North Sea, following a significant redevelopment to enable gas production after years of the field producing only oil. Peak production could reach 30,000 barrels of oil equivalent per day, more than double the output before the redevelopment.
On March 31, Shell USA, Inc., a subsidiary of SHEL, completed the previously announced acquisition of Volta Inc. in an all-cash transaction valued at nearly $169 million. With this acquisition, SHEL now owns and operates one of the largest public Electric Vehicle (EV) charging networks in the United States.
Volta provides SHEL with an existing public charging network of over 3,000 charge points across 31 U.S. states and territories, a development pipeline of over 3,400 additional charge points, and capabilities to develop, operate, and monetize E.V. charging infrastructure.
For the second quarter that ended June 30, 2023, SHEL’s adjusted EBITDA from the Marketing segment increased 10.5% year-over-year to $1.60 billion. The segment’s cash inflow from operating activities was $1.41 billion, compared to an outflow of 454 million in the prior year’s period.
In addition, the company’s Renewables and Energy Solutions segment’s cash inflow from operating activities came in at $3.19 billion, compared to an outflow of $558 million in the previous year’s quarter. As of June 30, 2023, the company’s cash and cash equivalents stood at $45.09 billion versus $40.25 billion as of December 31, 2022.
Analysts expect SHEL’s revenue for the fiscal year (ending December 2024) to increase 2.8% year-over-year to $349.81 billion. The company’s EPS for the next year is expected to grow 1.4% from the prior year to $8.49. Moreover, the company surpassed the consensus revenue and EPS estimates in three of the trailing four quarters.
The stock has gained 14.2% year-to-date and 20.2% over the past year to close the last trading session at $63.93.
Shares of SHEL have gained 16.2% over the past year to close the last trading session at $61.42.
SHEL’s solid fundamentals and prospects are apparent in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
SHEL has an A grade for Momentum and a B for Stability and Quality. It is ranked #7 in the 87-stock Energy - Oil & Gas industry.
In addition to the POWR Ratings I’ve just highlighted, you can see SHEL’s ratings for Growth, Value, and Sentiment here.
What To Do Next?
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SHEL shares rose $0.75 (+1.17%) in premarket trading Thursday. Year-to-date, SHEL has gained 15.61%, versus a 17.64% 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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