Despite facing complex economic and geopolitical obstacles, the energy sector demonstrated immense resilience. The energy market, buoyed by strong oil demand and well-positioned for consolidation, presents an unprecedented opportunity for enhancing portfolio returns.
Therefore, quality oil stocks Ultrapar Participações S.A. (UGP), Transportadora de Gas del Sur S.A. (TGS), and Repsol, S.A. (REPYY), with the potential to leverage on the industry tailwinds and offer substantial returns, could be wise portfolio additions this month.
Before delving deeper into the fundamentals of these stocks, let's first discuss the latest developments within the oil and gas sector.
The escalating Israel-Hamas conflict amid the ongoing Russian-Ukrainian war adds significant tension to the global market. If the unrest intensifies throughout the Middle East, the World Bank anticipates potential surges in oil prices.
The perceived involvement of Iran in the Hamas' assault on Israel may result in more stringent sanctions by the U.S. The primary concern of U.S. National Security Advisor Jake Sullivan lies with Hezbollah, based in Lebanon, possibly instigating attacks on Israel from their northern frontiers.
Should the conflict exacerbate, and considering that the Middle East accounts for roughly 30% of global oil production, there is the potential for oil prices to rise beyond $100/barrel. Regardless of how the conflict's eventual scope may affect oil supply, Saudi Arabia and Russia’s production cuts could cause an uptick in oil prices.
Simultaneously, global oil demand appears to be promising. OPEC predicts that by 2028, it will reach 110.2 million b/d, with non-OECD oil accounting for a rise of 10.1 million b/d, reaching 63.7 million b/d.
Standard Chartered’s supply-demand dynamics underpin its Brent forecast for 2024 at $98/bbl. They estimate that Brent prices will average $109 per barrel in 2025, escalating further to $128 per barrel by 2026.
With these favorable trends in mind, let's delve into the fundamentals of the three A-rated Foreign Oil & Gas industry stock picks, beginning with the third choice.
Stock #3: Ultrapar Participações S.A. (UGP)
Headquartered in São Paulo, Brazil, UGP operates in the energy and infrastructure business. It operates in five segments: Gas distribution (Ultragaz); Fuel distribution (Ipiranga); Chemicals (Oxiteno); Storage (Ultracargo); and Drugstores (Extrafarma).
On August 25, UGP paid a dividend of R$ 0.25 per common share. Its annualized dividend rate of $0.07 per share translates to a dividend yield of 1.59% on the current share price. Its four-year average yield is 3.07%.
UGP’s trailing-12-month cash per share of $1.03 is 29.1% higher than the industry average of $0.80, while its trailing-12-month asset turnover ratio of 3.84x is 580.3% higher than the industry average of 0.56x.
Over the past three and five years, its tangible book value grew at CAGRs of 11.1% and 7.4%, respectively, while its revenue grew at 17.2% and 9.7% CAGRs over the same periods.
For the fiscal second quarter that ended June 30, 2023, UGP’s net revenues from sales and services and gross profit stood at R$29.59 billion ($6.06 billion) and R$1.67 billion ($342.73 million), respectively.
For the same quarter, its net income and earnings per share stood at R$238.70 million ($48.92 million) and R$0.20, respectively. Its adjusted EBITDA stood at R$964.20 million ($197.61 million).
Street expects UGP’s EPS in the fiscal year ending December 2023 to increase 167.4% year-over-year to $0.22, while its revenue is expected to come at $25.66 billion.
The stock has gained 84.3% year-to-date to close the last trading session at $4.46. Over the past year, it gained 67.7%.
UGP’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
UGP also has a B grade for Growth and Value. It is ranked #8 out of 44 stocks in the A-rated Foreign Oil & Gas industry.
To see UGP’s grades for Momentum, Stability, Sentiment, and Quality, click here.
Stock #2: Transportadora de Gas del Sur S.A. (TGS)
Headquartered in Buenos Aires, Argentina, TGS transports natural gas and produces and commercializes natural gas liquids in Argentina. The company has four segments: Natural Gas Transportation Services; Liquids Production and Commercialization; Other Services; and Telecommunications.
The stock’s trailing-12-month CAPEX/Sales of 27.47% is 100.2% higher than the industry average of 13.72%, while its trailing-12-month EBIT margin of 23.43% is 2.7% higher than the industry average of 22.81%.
TGS’ revenue grew at CAGRs of 25.7% and 32% over the past three and five years, respectively. In addition, its total assets grew at 80.7% and 89% CAGRs over the same periods.
TGS’ revenues stood at ARS74.59 billion ($213.12 million) for the fiscal third quarter that ended September 30, 2023, while its operating profit came at ARS17.29 billion ($49.39 million). Its total comprehensive income and earnings per ADS were ARS4.88 billion ($13.95 million) and ARS32.43, respectively.
The company’s total current assets stood at ARS221.76 billion ($633.61 million) as of September 30, 2023, compared to ARS156.94 billion ($448.41 million) as of December 31, 2022.
TGS’ revenue is expected to increase 16.7% year-over-year to $850.82 million for the fiscal year ending December 2023. The company’s EPS for the same period is expected to be $0.31. Moreover, it surpassed consensus EPS estimates in each of the trailing four quarters.
The stock has gained 1.4% intraday to close the last trading session at $10.34. Over the past year, it gained 14.3%.
TGS’ POWR Ratings reflect a positive outlook. The stock has an overall B rating, which indicates a Buy in our proprietary rating system.
TGS has a B grade for Value, Momentum, Sentiment, and Quality. Within the same industry, it is ranked #6.
Click here for TGS’ additional POWR Ratings (Growth and Stability).
Stock #1: Repsol, S.A. (REPYY)
Based in Madrid, Spain, REPYY’s Upstream segment explores, develops, and produces crude oil and natural gas. The Industrial segment encompasses refining, petrochemicals, trading, and oil and gas transportation. The Commercial and Renewables segment focuses on low-carbon power generation.
In October, REPYY completed the purchase of an additional 6.75% stake in the Reggane Nord asset in Algeria. The operation is part of the European strategy of searching for opportunities to increase its participation in gas supplies to Europe.
On September 7, REPYY acquired the renewable energy platform ConnectGen from Quantum Capital Group, a capital provider to the global energy and energy transition industries, with a 20,000 MW pipeline and development capabilities, for $768 million. This should bode well for the company.
The combination of dividends and capital reductions will result in the distribution of close to €2.4 billion ($2.57 billion) to shareholders this year. In addition, REPYY has announced the payment of a gross remuneration of €0.4/share in January 2024.
Its annualized dividend rate of $0.76 per share translates to a dividend yield of 5.10% on the current share price. Its four-year average yield is 7.05%. REPYY’s dividend payments have grown at a CAGR of 10.7% over the past three years.
REPYY’s trailing-12-month cash from operations of $7.18 billion is 999.5% higher than the industry average of $653.45 million, while its trailing-12-month asset turnover ratio of 0.86x is 52.6% higher than the industry average of 0.56x.
Over the past three and five years, its revenue grew at 21.6% and 5.3% CAGRs, respectively, while EBITDA grew at CAGRs of 62.6% and 2.7% over the same periods.
For the fiscal third quarter that ended September 2023, REPYY’s sales stood at €15.50 billion ($16.57 billion), while operating net income came at €1.88 billion ($2.01 billion), up 26.9% year-over-year.
For the same quarter, its net income attributable to the parent and earnings per share attributable to the parent stood at €1.37 billion ($1.46 billion) and €1.07, up 99.9% and 127.7% from the year-ago quarter, respectively.
Street expects REPYY’s revenue and EPS in the fiscal year ending December 2023 to come at $64.21 billion and $4.02, respectively.
The stock has gained 1% over the past year to close the last trading session at $14.41. Over the past six months, it gained marginally.
REPYY’s robust outlook is reflected in its POWR Ratings. The stock has an overall rating of A, translating to Strong Buy in our proprietary rating system.
REPYY has an A grade for Momentum and a B for Growth, Value, Stability, and Sentiment. Within the same industry, it is ranked #3.
Beyond what we’ve stated above, we have also rated the stock for Quality. Get all ratings of REPYY here.
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REPYY shares were unchanged in premarket trading Wednesday. Year-to-date, REPYY has declined -5.85%, versus a 15.52% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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