As the energy sector navigates a complex landscape of rising demand and geopolitical tensions, fundamentally sound stocks like Diamondback Energy, Inc. (FANG), Weatherford International plc (WFRD), and VAALCO Energy, Inc. (EGY) emerge as top picks for investors seeking high profitability and growth potential.
Recent movements in oil prices underscore the sector’s volatility and promise. Oil prices rose by about 1% on Monday, driven by robust summer driving demand and heightened geopolitical tensions, including drone attacks on Russian refineries.
The easing of the U.S. dollar further bolstered crude prices, with Brent futures for August delivery settling at $86.01 a barrel and U.S. crude at $81.63 a barrel. Both benchmarks increased roughly 3% last week, marking their second consecutive weekly gain.
OPEC remains bullish on global oil demand, with a 2.3 million barrels per day increase in the second half of the year, driven by economic growth in China and other emerging economies. The organization’s plan to gradually restore 2 million barrels per day of production from October, led by Saudi Arabia, initially caused market jitters but is viewed as manageable to meet growing demand without oversupplying.
The organization’s optimistic demand projections suggest confidence in managing the supply restart without destabilizing global markets, aiming to meet a projected third-quarter supply requirement of 43.6 million barrels per day.
Additionally, the extension of OPEC+ production cuts through the third quarter of 2024 is expected to push Brent prices to an average of $85 per barrel in the latter half of the year, potentially leading to increased global oil inventory withdrawals.
With that in mind, let’s look at the fundamentals of these stocks in detail, beginning with number 3.
Stock #3: Diamondback Energy, Inc. (FANG)
With a 35.29 billion market cap, FANG is an independent oil and natural gas company that acquires, develops, and explores unconventional and onshore oil and natural gas reserves in the Permian Basin in West Texas.
On May 28, FANG announced the sale of its 25% stake in WTG Midstream Holdings LLC to Energy Transfer LP (ET) for approximately $375 million pre-tax. The sale, expected to close in Q3 2024, represents a 3.5x return on invested capital for Diamondback. The proceeds will be used to reduce debt related to the pending merger with Endeavor Energy Resources, L.P.
The stock’s trailing-12-month gross profit and levered FCF margins of 82.49% and 10.97% are 84.6% and 79.9% higher than the respective industry averages of 44.70% and 6.10%. Likewise, its 38.66% trailing-12-month net income margin compares to the 11.48% industry average.
FANG’s total revenue increased 15.7% year-over-year to $2.23 billion in the first quarter ended March 31, 2024. Its income from operations grew 9.1% from the year-ago value to $1.12 billion, while its net income improved by 7.9% year-over-year to $768 million. The company’s earnings per common share increased 10.3% from its year-ago value to $4.28.
The consensus EPS estimate of $4.79 for the fiscal second quarter (ending June 2024) indicates a 30.2% improvement year-over-year. The consensus revenue estimate of $2.27 billion for the same quarter reflects an 18.3% increase from the same period last year. The company has an impressive earnings surprise history; it surpassed the consensus EPS estimates in three of the trailing four quarters.
Moreover, its revenue and EBITDA have grown at impressive CAGRs of 42.6% and 72.8%, respectively, over the past three years. Also, its levered FCF has improved at a 98.4% CAGR over the same period.
Over the past year, the stock has gained 63.1% to close its last trading session at $197.88.
FANG’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to 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 Growth. Among the 81 stocks in the Energy - Oil & Gas industry, it is ranked #18. Click here to see the other ratings of FANG for Value, Momentum, Stability, and Sentiment.
Stock #2: Weatherford International plc (WFRD)
WFRD provides equipment and services for drilling, evaluation, completion, production, and intervention in oil, geothermal, and natural gas wells worldwide. The company operates through three segments: Drilling and Evaluation; Well Construction and Completions; and Production and Intervention.
On June 11, the company increased its Credit Facility by $40 million, bringing the total to $720 million, with a new lender. The facility now includes a $327 million tranche for performance letters of credit and a $393 million tranche for revolving loans. Additionally, the accordion feature was amended to allow an increase of up to $1 billion.
CEO Girish Saligram highlighted that this expansion enhances WFRD’s liquidity and capital structure, reflecting strong confidence from banking partners in the company’s performance and future prospects.
WFRD’s trailing-12-month levered FCF margin of 11.78% is 93.3% higher than the 6.10% industry average. Similarly, its 8.98% trailing-12-month ROTA is 60.2% above the 5.61% industry average. In addition, the stock’s trailing-12-month ROCE of 55.13% favorably compares to the industry average of 13.64%.
For the fiscal first quarter that ended March 31, 2024, WFRD reported a 14.5% year-over-year increase in total revenues of $1.36 billion. Its operating income grew by 25.9% from the prior year’s quarter to $233 billion, while its adjusted EBITDA stood at $336 million, up 24.9% year-over-year.
The company’s attributable net income amounted to $112 million and $1.50 per share, reflecting an increase of 55.6% and 54.6% from the year-ago quarter, respectively. Moreover, its adjusted free cash flow improved by 203.7% year-over-year to $82 million.
Street expects WFRD’s EPS to increase 48.8% year-over-year in the second quarter (ending June 30, 2024) to $1.70. Its revenue for the current quarter is projected to grow by 10.9% from the prior year to $1.41 billion. Further, WFRD has topped the consensus EPS estimate in three of the trailing four quarters, which is promising.
Over the past three years, its revenue and EBITDA have grown at respective CAGRs of 17.1% and 76.8%. Likewise, its levered FCF has increased at an 8.8% CAGR over the same time frame.
The stock has soared 93.6% over the past year and 23.9% year-to-date to close the last trading session at $121.26.
WFRD’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system.
It also has an A grade for Momentum and a B for Growth and Quality. Within the same industry, it is ranked #9. To see additional POWR Ratings for WFRD for Value, Stability, and Sentiment, click here.
Stock #1: VAALCO Energy, Inc. (EGY)
EGY acquires, explores, develops, and produces crude oil, natural gas, and natural gas liquids in Gabon, Egypt, Equatorial Guinea, and Canada.
On April 30, EGY completed the all-cash acquisition of Svenska Petroleum Exploration AB for $40.2 million, enhancing its production capacity in the Baobab field. It now produces over 5,000 barrels of oil equivalent per day (99% oil).
This acquisition strategically expands EGY's presence in West Africa, particularly in Cote d'Ivoire, an investment-friendly country with significant upside potential. Further, the move bolsters EGY's growth prospects and regional operational footprint.
The stock’s trailing-12-month gross profit and EBITDA margins of 65.35% and 60.36% are 46.2% and 78.8% higher than the industry averages of 44.70% and 33.76%, respectively. Likewise, its 29.24% trailing-12-month levered FCF margin compares favorably to the 6.10% industry average.
During the fourth quarter (ended December 31, 2023), EGY’s revenue increased 24.6% year-over-year to $100.16 million. Its operating income grew 48.9% from the year-ago value to $32.19 million. The company’s net income amounted to $7.69 million and $0.07 per share, reflecting a year-over-year improvement of 121.5% and 133.3%, respectively. In addition, its adjusted EBITDAX stood at $61.74 million, up 29.1% year-over-year.
Analysts expect EGY’s revenue to increase 15.1% year-over-year to $125.74 million for the current quarter (ending June 2024), while its EPS is expected to grow 18.2% from the prior year to $0.13 in the same period. The company has also surpassed the consensus revenue estimates in three of the trailing four quarters, which is impressive.
Moreover, the stock’s revenue and net income have grown at impressive CAGRs of 75% and 64.6% over the past three years, respectively. Similarly, its EPS has grown at a 33.9% CAGR over the same period.
EGY’s shares have gained 74.7% over the past year and 44.3% year-to-date to close the last trading session at $6.48.
It’s no surprise that EGY has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Sentiment and a B for Growth, Value, and Quality. Out of 81 stocks in the same industry, it is ranked #8.
In addition to the POWR Ratings we’ve stated above, we also have EGY’s ratings for Momentum and Stability. Get all EGY ratings here.
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FANG shares were trading at $196.99 per share on Wednesday afternoon, down $0.89 (-0.45%). Year-to-date, FANG has gained 30.45%, versus a 15.28% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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