The energy sector, buoyed by record levels of oil production and substantial oil and gas demand, currently offers an unparalleled opportunity for boosting portfolio returns. Against this backdrop, fundamentally strong oil and gas stocks Energy Transfer LP (ET), Sunoco LP (SUN), and Transportadora de Gas del Sur S.A. (TGS) could be solid buys now.
Global marketplace stability remains uncertain as tensions escalate within the Israel-Hamas conflict and the ongoing discord between Russia and Ukraine. The World Bank has hinted at possible oil price surges in the event of increasing unrest across the Middle East.
Since approximately 30% of global oil production hails from the Middle East, escalating turmoil could push oil prices above $100 per barrel. Regardless of the potential influence of conflict severity on oil supply, supply cuts by Saudi Arabia and Russia may trigger a rise in oil prices.
Recent gains in oil prices followed OPEC’s Monthly Oil Market Report (MOMR), signaling the cartel’s confidence in market fundamentals and suggesting demand in the U.S. and China is sustainably managed. Standard Chartered anticipates Brent prices to reach $98/bbl for 2024, $109 per barrel in 2025, and $128 per barrel in 2026.
Current U.S. strategies aimed at lowering carbon emissions seem to have no adverse effect on the country’s crude oil output, effectively at its zenith. Global oil demand continues to show promising growth prospects. The U.S. Energy Information Administration (EIA) projects that U.S. natural gas production and demand could shatter existing records by 2023.
Estimations show dry gas production reaching 103.7 billion cubic feet per day (bcfd) in 2023 and 105.1 bcfd in 2024. Domestic consumption is projected to rise to 89.4 bcfd in 2023.
With these favorable trends in mind, let's delve into the fundamentals of the three energy sector stocks.
Energy Transfer LP (ET)
With a market cap of $42.93 billion, ET owns and operates one of the most diversified portfolios of energy assets in the U.S., with nearly 120,000 miles of pipeline and associated energy infrastructure. Its core operations include complementary natural gas midstream, intrastate, and interstate transportation and storage assets; and crude oil, natural gas liquids, and refined product transportation and terminalling assets.
On November 3, ET acquired Crestwood Equity Partners LP. ET now owns and operates more than 125,000 miles of pipelines and related assets in all the major U.S.-producing regions and markets across 41 states, further enhancing its leadership position in the midstream sector.
On October 20, ET announced a quarterly distribution of $0.3125 per ET common unit, a $0.31 increase per ET common unit, payable to unitholders on November 20, 2023. Its annual dividend of $1.25 per share translates to a dividend yield of 9.36% on the current share price.
Its four-year average yield is 10.30%. ET’s dividend payments have grown at a 5% CAGR over the past three years and grown marginally over the past five years.
ET’s trailing-12-month asset turnover ratio of 0.74x is 34.4% higher than the industry average of 0.55x, while its trailing-12-month cash from operations of $9.60 billion is significantly higher than the industry average of $678.95 million.
In the fiscal third quarter that ended September 30, 2023, ET’s revenues stood at $20.74 billion, while operating income increased 13.2% year-over-year to $2.23 billion. Moreover, adjusted EBITDA stood at $3.54 billion, up 14.7% from the prior-year quarter. For the same quarter, net income attributable to partners and net income per common unit stood at $584 million and $0.15, respectively.
Street expects ET’s revenue and EPS in the fiscal fourth quarter ending December 2023 to increase 7.2% and 4.7% year-over-year to $21.98 billion and $0.36, respectively.
The stock has gained 12.6% year-to-date to close the last trading session at $13.36. Over the past year, it has gained 11%.
ET’s solid outlook is reflected in its POWR Ratings. The stock has an overall B rating, translating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted optimally.
The stock has a B grade for Value and Momentum. In the 85-stock Energy – Oil & Gas industry, ET is ranked #5.
In addition to the POWR Ratings highlighted above, one can see ET’s ratings for Growth, Stability Quality, Sentiment, and here.
Sunoco LP (SUN)
With a market cap of $4.55 billion, SUN is a distributor and retailer of motor fuels in the United States. The company operates through the two broad segments of Fuel Distribution and Marketing, purchasing motor fuels from independent refiners and oil companies and supplying to independent dealer stations; and All Other.
On October 20, 2023, SUN declared a quarterly distribution for the third quarter of 2023 of $0.8420 per common unit or $3.368 per common unit on an annualized basis. The distribution will be paid on November 20, 2023.
Its four-year dividend yield is 9.65%. Its annual dividend yields 6.23% on the current market price.
On September 20, 2023, SUN completed an offering of $500 million 7% Senior Notes due 2028. SUN used the net proceeds from the offering to repay a portion of the outstanding borrowings under its $1.50 billion revolving credit facility.
SUN’s trailing-12-month asset turnover ratio of 3.35x is 511.1% higher than the industry average of 0.55x. Its trailing-12-month ROCE and ROTA of 43.84% and 7.53% are 126.9% and 5.9% higher than the industry averages of 19.32% and 7.11%, respectively.
In the fiscal third quarter that ended September 30, 2023, SUN’s total revenues stood at $6.32 billion, while operating income increased 125.3% year-over-year to $338 million. Moreover, adjusted EBITDA stood at $257 million.
For the same quarter, net income and comprehensive income, and net income per common unit stood at $272 million and $2.95, up 227.7% and 293.3% from the prior-year quarter, respectively.
Street expects SUN’s revenue in the fiscal fourth quarter ending December 2023 to increase marginally year-over-year to $5.96 billion, while its EPS is expected to increase 128.6% year-over-year to $0.96. The company surpassed consensus revenue estimates in each of the trailing four quarters, which is impressive.
The stock has gained 22.2% over the past six months to close the last trading session at $54.08. Over the past year, it has gained 26.5%.
SUN’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, equating to a Buy in our proprietary rating system.
The stock has an A grade for Growth and a B for Sentiment and Stability. It is ranked #8 among 26 stocks in the A-rated MLPs – Oil & Gas industry.
To see SUN’s additional ratings (Value, Momentum, and Quality), click here.
Transportadora de Gas del Sur S.A. (TGS)
With a market cap of $3.89 billion, TGS, headquartered in Buenos Aires, Argentina, 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 3.4% higher than the industry average of 22.67%.
In the fiscal third quarter that ended September 30, 2023, TGS’ revenues and operating profit stood at ARS 74.59 billion ($212.27 million) and ARS 17.29 billion ($49.20 million), respectively.
For the same quarter, its total comprehensive income and earnings per ADS stood at ARS 4.88 billion ($13.89 million) and ARS 32.43, respectively. Moreover, its free cash flow stood at ARS 3.04 billion ($8.65 million).
Street expects TGS’ revenue in the fiscal year ending December 2023 to increase 16.7% year-over-year to $850.82 million. Its EPS is expected to be $0.31. The company surpassed consensus EPS estimates in each of the trailing four quarters.
The stock has gained 11.6% over the past year to close the last trading session at $9.95.
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, Stability, Sentiment, and Quality. Within the A-rated 44-stock Foreign Oil & Gas industry, it is ranked #3.
Click here for TGS’ additional POWR Ratings (Growth).
What To Do Next?
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ET shares rose $0.05 (+0.37%) in premarket trading Thursday. Year-to-date, ET has gained 23.81%, versus a 18.89% 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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