The energy sector’s outlook appears positive as crude oil prices are expected to rise amid inadequate supply and ongoing geopolitical tensions in the Middle East. Also, China’s measures to boost its economy and the Federal Reserve’s expected rate cuts this year are likely to drive crude oil demand.
Given the industry’s bright prospects, it could be wise to consider investing in fundamentally strong energy stocks Petróleo Brasileiro S.A. – Petrobras (PBR), REX American Resources Corporation (REX), and Unit Corporation (UNTC).
Before diving deeper into the fundamentals of these stocks, let’s understand what’s shaping the energy sector prospects.
Oil prices rose yesterday due to lower-than-expected increases in U.S. crude inventories and considerable decreases in gasoline inventories. The EIA said that U.S. crude inventories rose 1.4 million barrels in the week ended March 1, while gasoline inventories dropped 4.5 million barrels and stocks of distillates fell 4.1 million barrels.
According to analysts, crude inventories were expected to rise by 3.7 million barrels, while gasoline supplies were expected to drop by 2.3 million barrels, and distillates were forecast to decline by 800,000 barrels.
The unexpected data on inventories and supplies caused concerns about potential shortages in the market, leading to the price rise. Analysts predict that the trend of rising oil prices may continue in the near future if these supply constraints persist.
Oil prices are expected to rise after OPEC+ extended voluntary supply curbs by 2.2 million bpd through Q2. Russia also reported an additional 417 thousand bpd reduction in the second quarter. The decision aims to keep prices stable in the face of demand concerns.
OPEC+ extended production cuts will reduce overall group production to 34.6 million bpd in the second quarter, down from the prior expectation of output exceeding 36 million bpd. OPEC forecasts global oil demand growth to remain steady at 2.2 million bpd in 2024, with a slight increase expected in the U.S. due to improving economic conditions, offsetting a downward revision in OECD Europe.
Global oil demand is projected to grow by 1.8 million bpd in 2025. Crude oil supply is also under stress as the Iran-backed Houthis continue to attack shipping vessels in the Red Sea, driving up transportation costs. According to the EIA’s short-term energy outlook, global consumption of liquid fuels will rise by 1.4 million b/d in 2024 and 1.3 million b/d in 2025.
With China announcing a string of economic stimulus measures, demand for crude oil is expected to rebound, especially as the nation happens to be the biggest importer of crude oil. Moreover, the Federal Reserve is likely to start cutting rates in the second half of the year, which could further boost the demand for commodities, especially crude oil.
The oil and gas industry is expected to be valued at $9.35 trillion by 2028, growing at a 5.2% CAGR. Furthermore, with the rise in energy demand across the world, there is a growing need for energy services. The shift towards renewable energy sources and the need for cost-effective energy management solutions is also fueling the demand for energy services.
Global energy as a service market is expected to reach $140.50 billion by 2030, growing at a CAGR of 9.6%. Investors’ interest in energy stocks is evident from the Energy Select Sector SPDR ETF’s (XLE) 7.8% returns over the past three months.
Considering these conducive trends, let’s analyze the fundamental aspects of the featured energy stocks.
Petróleo Brasileiro S.A. – Petrobras (PBR)
Headquartered in Rio de Janeiro, Brazil, PBR explores, produces, and sells oil and gas in Brazil and internationally. The company operates through Exploration and Production, Refining, Transportation and Marketing, and Gas and Power.
PBR’s trailing-12-month levered FCF margin of 35.73% is 469.6% higher than the industry average of 6.27%. Its 20.23% trailing-12-month ROTC is 136.5% higher than the 8.55% industry average. Additionally, its 25.53% trailing-12-month net income margin is 95.1% higher than the 13.08% industry average.
During the fiscal fourth quarter that ended December 31, 2023, PBR’s sales revenue amounted to $27.11 billion, while gross profit came at $14.65 billion, up 0.5% year-over-year. Its net income for the period stood at $6.28 billion. As of December 31, 2023, the company’s cash and cash equivalents stood at $12.73 billion, compared to $8 billion as of December 31, 2022.
Street expects PBR’s EPS and revenue for the quarter ending June 30, 2024, to increase 5.2% and 14% year-over-year to $0.96 and $26.07 billion, respectively. Over the past year, the stock has gained 58.6% to close the last trading session at $16.70.
PBR’s POWR Ratings reflect this promising outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Quality and a B for Momentum. Within the A-rated Foreign Oil & Gas industry, it is ranked #12 out of 41 stocks. To see PBR’s ratings for Growth, Value, Stability, and Sentiment, click here.
REX American Resources Corporation (REX)
REX specializes in ethanol production and sales, alongside offerings of corn, distillers grains, non-food grade corn oil, gasoline, and natural gas. Additionally, the company supplies dry distillers grains with solubles, a valuable protein source utilized in animal feed.
REX’s trailing-12-month ROTA of 7.73% is 16.4% higher than the 6.64% industry average. Furthermore, its trailing-12-month asset turnover ratio of 1.41x is 164.8% higher than the 0.53x industry average.
For the fiscal third quarter that ended October 31, 2023, REX’s net sales and revenue marginally increased year-over-year to $221.08 million. Its gross profit grew 323.7% from the year-ago value to $39.29 million.
In addition, net income and net income per share attributable to REX common shareholders rose 719% and 727.8% from the prior year’s period to $26.08 million and $1.49, respectively.
Analysts expect REX’s EPS for the quarter ended January 31, 2024, to increase 51.1% year-over-year to $0.71. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 36.8% to close the last trading session at $44.08.
It’s no surprise that REX has an overall B rating, equating to a Buy in our POWR Ratings system.
It has a B grade for Growth and Sentiment. It is ranked #9 out of 50 stocks in the Energy - Services industry. Beyond what is stated above, we’ve also rated REX for Value, Momentum, Stability, and Quality. Get all the REX ratings here.
Unit Corporation (UNTC)
UNTC and its subsidiaries explore, acquire, develop, and produce oil and natural gas properties in the United States. They operate through three segments: Oil and Natural Gas, Contract Drilling, and Mid-Stream.
UNTC’s trailing-12-month ROCE of 70.26% is 297.8% higher than the 17.66% industry average. Its trailing-12-month ROTA of 50.06% is 653.7% higher than the 6.64% industry average. Additionally, its 70.66% trailing-12-month net income margin is 440.1% higher than the 13.08% industry average.
For the nine months that ended September 30, 2023, UNTC’s total revenues stood at $252.67 million. Likewise, its income from operations came in at $108.31 million. The company’s net income and net income per common share attributable to UNTC increased 115.1% and 122.4% from the year-ago value to $191.50 million and $19.55, respectively.
Over the past year, the stock has gained 20.9% to close the last trading session at $39.58.
UNTC’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system.
It is ranked #13 out of 84 stocks in the Energy - Oil & Gas industry. It has a B grade for Value and Quality. To see the additional UNTC ratings for Growth, Momentum, Stability, and Sentiment, click here.
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PBR shares were trading at $14.67 per share on Friday morning, down $2.03 (-12.16%). Year-to-date, PBR has declined -8.14%, versus a 8.51% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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