With Saudi Arabia deciding to extend its voluntary crude oil production cut, strikes in a major LNG facility in Australia, and droughts in Panama, the outlook for demand for conventional energy is expected to remain tight in the foreseeable future. The consequent tailwinds could brighten the prospects of quality energy stocks Marathon Oil Corporation (MRO), Par Pacific Holdings, Inc. (PARR), and MV Oil Trust (MVO).
Consumers have been above and beyond to compensate for the years spent indoors trying to out-of-home experiences with virtual ones. As a result, air carriers are turning to bigger airplanes, even on shorter routes, and jumbo-jets, such as the Boeing 747 and the Airbus A380, are being brought back to help ease airport congestion and work around pilot shortages.
However, despite macroeconomic headwinds, supply has struggled to keep up with the demand. After Saudi Arabia-led OPEC+ surprise announcement of a cut of more than a million barrels of output a day and a reduction of 2 million barrels a day agreed upon in October 2022, the heavyweight oil producer has decided to extend its production cut into September of this year.
This has taken about 3% of the world’s petroleum production taken off the market in seven months. The redrawing of the global energy map and shifting geopolitical inclinations in the Middle East since the beginning of the conflict in Ukraine has been nothing short of a windfall for U.S. energy producers. The U.S. has “gone from (being) a very domestically focused market into an international powerhouse.”
American crude oil production is going through a purple patch and is set to have a record-breaking couple of years. The EIA forecasts that U.S. crude oil production will average 12.4 million bpd in 2023 and 12.8 million bpd in 2024. This has been countering OPEC+ production cuts and keeping prices in check.
With the surge in gas price in Europe in anticipation of a potential strike at an LNG facility in Australia and a Panama Canal pile-up due to drought placing further constraints on supply, both OPEC and the Paris-based International Energy Agency both forecast a pickup in demand that could lead to supply tightness. This could translate into upside potential for U.S. energy producers as well as the businesses serving them.
With the above context, let’s take a closer look at the featured stocks.
Marathon Oil Corporation (MRO)
As an exploration and production company, MRO explores, produces, and markets crude oil, condensate, and natural gas liquids (NGLs) in domestic and international markets. The company operates through two geographical segments: United States and International.
On July 26, MRO announced that its board of directors declared a dividend of 10 cents per share of common stock. The dividend is payable on September 11, 2023, to stockholders of record on August 16, 2023.
MRO pays $0.40 annually as dividends which translates to a 1.52% yield at the current price. The company’s dividend payouts have grown at a 13.1% CAGR over the past five years.
During the fiscal year 2023 second quarter, MRO’s total revenue and other income amounted to $1.51 billion, while its income from operations came in at $454 million. During the same period, the company’s adjusted net income came in at $295 million, or $0.48 per share.
Moreover, MRO returned $434 million (consisting of share repurchases worth $372 million and $62 million base dividend) to shareholders during the second quarter, an approximate 10% increase from first quarter 2023 shareholder distributions.
MRO’s trailing-12-month gross profit and net income margins of 78.06% and 30.56% surpass the respective industry averages of 47.34% and 14.13%. Moreover, due to the consistent capital discipline through share repurchases and dividend payouts, its trailing-12-month Return on Capital Employed (ROCE), Return on Total Capital (ROTC), and Return on Total Assets (ROTA) of 17.97%, 9.59%, and 10.27% also exceed its 5-year averages of 7.17%, 3.68%, and 4.15%, respectively.
Analysts expect MRO’s revenue and EPS for the fiscal third quarter to increase sequentially by 8.7% and 16.7% to $1.62 billion and $0.56, respectively. Moreover, the company has impressed by surpassing consensus EPS estimates in each of the trailing four quarters.
The stock has gained 11.7% over the past month to close the last trading session at $26.24.
MRO’s qualitative superiority is reflected in its POWR Ratings. The stock has been rated B for Quality, equating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
MRO is ranked #71 of 88 stocks in the Energy – Oil & Gas industry. Click here for additional ratings of MRO.
Par Pacific Holdings, Inc. (PARR)
PARR owns and operates energy and infrastructure businesses that provide both renewable and conventional fuels to the Western United States. The company operates through three segments: Refining; Retail; and Logistics.
On June 1, PARR announced its acquisition of the Billings refinery and related marketing and logistics assets and related marketing and logistics assets from Exxon Mobil Corporation (XOM) and two of its subsidiaries. The company expects this acquisition to bring economies of scale and benefits of geographical diversification while positively impacting the bottom line and cash flows.
On April 27, PARR revealed its intentions to invest around $90 million in establishing the largest liquid renewable fuels manufacturing facility in Hawaii, to be located at its Kapolei refinery. The project, set to be commissioned in 2025, would produce up to 60% SAF (Sustainable Aviation Fuel) by leveraging the expertise and experience of the refinery’s operating team, existing tank storage, and related logistics.
During the six months of the fiscal year 2023 that ended June 30, PARR’s revenues increased by 0.4% year-over-year to $3.47 billion, while its adjusted EBITDA increased by 25.1% year-over-year to $318.47 million. As a result, the company’s adjusted net income for the period increased by 43.1% and 39.6% year-over-year to $243.09 million, or $3.98 per share, respectively.
PARR’s trailing-12-month gross profit and EBITDA margins of 17.09% and 11.09% exceed the five-year averages of 9.83% and 2.28%, respectively. Moreover, its trailing-12-month ROCE, ROTC, and ROTA of 103.51%, 29.62%, and 17.18% are also higher than the respective industry averages of 21.13%, 10.40%, and 8.28%.
Analysts expect PARR’s revenue and EPS for the third quarter of the fiscal year 2023 to increase sequentially by 28.7% and 4% to $2.29 billion and $1.8, respectively. The company has also impressed by surpassing consensus EPS estimates in each of the trailing four quarters.
PARR’s stock has gained 30.8% over the past month and 64.3% year-to-date to close the last trading session at $36.24.
PARR’s POWR Ratings reflect this solid outlook. The stock has an overall B rating, which translates to Buy in our proprietary rating system. It also has a B grade for Quality, Momentum, and Value.
PARR is ranked #16 of 88 stocks in the Energy - Oil & Gas industry. Click here for additional POWR Ratings for PARR’s Growth, Stability, and Sentiment.
MV Oil Trust (MVO)
MVO is a statutory trust that acquires and holds net profits interests in the oil and natural gas properties of MV Partners, LLC, located in the Mid-Continent region in Kansas and Colorado.
On July 25, MVO distributed net profits of $3.74 million or $0.325 per unit for the quarterly payment period ended June 30, 2023.
MVO distributes $1.30 per unit annually. This translates to a yield of 10.60% at the current price. Its dividend payouts have grown at a 20% CAGR over the past five years.
MVO’s trailing-12-month gross profit and net income margins of 100% and 93.5% are significantly higher compared to the industry averages of 47.34% and 14.13%, respectively. Moreover, its trailing-12-month ROCE, ROTC, and ROTA of 362.50%, 226.56%, and 386.96% below the respective industry average out of the water.
The stock has dipped 9.7% over the past year to close the last trading session at $12.26.
MVO has an overall B rating, equating to a Buy in our POWR Ratings system. It has an A grade for Quality and a B for Momentum. It is ranked #14 of 90 stocks in the same industry.
Click here for additional POWR Ratings for MVO’s Growth, Value, Stability, and Sentiment.
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MRO shares were trading at $26.87 per share on Friday afternoon, up $0.63 (+2.40%). Year-to-date, MRO has gained 0.07%, versus a 17.33% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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