The price of oil has become top-of-mind for many investors. Wall Street is now watching global developments that could, unfortunately, escalate into full-on conflicts that historically bring with them higher oil prices. Sure enough, after breaking past its stubborn $75 a-barrel ceiling, oil prices reached $90 for the first time since October 2023.
Backed by a bullish narrative, potential interest rate cuts from the Federal Reserve (the Fed), and other fundamental trends, the rise of energy stocks looks imminent. Investors are still early, as industry trends show March to be the first expansion in the new cycle.
While picking any stock exposed to oil can be lucrative, investors may be best served by pairing their portfolios with the names that Wall Street is likely to pick. One example is found in Kinder Morgan Inc. (NYSE: KMI), where markets are comfortably bidding up its price, with some double-digit upside left.
The Energy Landscape Pushing Kinder Morgan's Stock
Analysts at The Goldman Sachs Group Inc. (NYSE: GS) pointed out that the price of oil was going as high as $100 a barrel this year. What once seemed to be an extreme view (when oil traded below $70) is now the more accepted reality affecting how some rotate their investment capital.
Such rotations have begun for the Vanguard Group, which—in the past quarter—bought up to $3 million worth of Kinder stock, bringing its total position to $3 billion.
Vanguard is not alone, as The PNC Financial Services Group Inc. (NYSE: PNC) saw fit to buy up to $2.5 million during the same period, bringing the group's total positioning to $5.8 million. The answer anyone is looking for now is whether this is the beginning or the end of a new energy trend.
According to the ISM manufacturing PMI index, a report commonly followed by professional investors and traders, it is only the beginning. After contracting for an entire quarter, the oil and gas industry experienced its first expansionary month in March 2024.
Considering that oil producers generally ramp up their production rates when oil is "expensive," corporate profits may soon flood the industry. According to the FedWatch tool by the CME Group Inc. (NASDAQ: CME), backed by the potential of September 2024 interest rate cuts, oil demand may rise as the manufacturing sector as a whole wakes up.
Lower rates will likely make the dollar index decline, making American exports more attractive to foreign buyers, where exports come into play. Manufacturing and shipping these exports will also add to further oil demand and increase its price.
Investors can also consider supply chains bottlenecked at the Red Sea, the Panama Canal suffering massive delays, and an increasing conflict between Israel and Iran as reasons to focus on the energy sector.
The Market's Landscape
After outperforming the broader S&P 500 by as much as 10% in the past quarter, the Energy Select Sector SPDR Fund (NYSEARCA: XLE) became one of the top-performing sectors in the economy. However, analysts don't regard all stocks in the space equally.
Two things usually drive stock prices: earnings per share (EPS) growth prospects and how the market values these EPS projections.
In the case of Kinder Morgan, analysts may have overlooked this $40 billion company to favor behemoths like Shell (NYSE: SHEL) and even BP (NYSE: BP). But markets have something else to say.
Projections to grow its EPS by merely 2% seems unreasonable for a company that trades at a 25% premium to its peers. Kinder Morgan's forward price-to-earnings (P/E) ratio of 15x goes above the industry's 12x average despite growth rates below the 10% average.
Even though Shell is looking to grow its EPS by 6.3%, its forward P/E reflects a discount of 44% to Kinder Morgan. The saying "It must be expensive for a reason" applies here, as Kinder stock is valued above BP's 7.3x forward P/E despite a potential 10.3% EPS growth this year.
Why Kinder Morgan?
The answer may lie inside the company's financials. Kinder Morgan's balance sheet is 50% debt, compared to Shell's 30% and BP's 40% markets. Therefore, analysts could be bullish because lower interest rates historically favor more leveraged companies.
Knowing this, Wall Street analysts see a consensus price target of $20.20 a share for Kinder stock, reflecting an 11.4% upside from today's price. On the other hand, Shell's $67 price target carries a net downside of 7.5%.
Likewise, Piper Sandler Co. (NYSE: PIPR) sees a $40 price target for BP, calling for only a 1.5% upside on that stock. Driven by its financials and exposure to the new oil trend, Kinder Morgan has a reason to be the market's premium choice.
