Under $5 Gems: 3 Top Oil & Gas Stocks to Consider

The robust oil and gas demand, coupled with dwindling supplies, may trigger a price surge, creating significant impetus for the energy sector.  Against this backdrop, fundamentally strong oil and gas stocks Santos Limited (SSLZY), Ultrapar Participações S.A. (UGP) and Martin Midstream Partners L.P. (MMLP), trading under $5, could be solid buys now.

Global oil demand continues to show promising growth prospects. OPEC’s monthly magazine indicates that the core factors influencing the oil market remain strong. It made minor upward revisions to its 2023 global oil demand growth forecast, maintaining its relatively lofty prediction for 2024.

OPEC anticipates oil demand to increase by 2.5 million barrels per day (bpd) this year, marking an elevation of 100,000 bpd from its former report. By 2024, they expect global oil demand to swell by another 2.25 million bpd. Moreover, reports suggest that China's crude oil imports remain sturdy and Asian refining margins remain firm. The International Energy Agency is aligned with OPEC's raised oil demand growth forecasts for 2023.

Tensions between Russia and Ukraine, alongside escalating unrest due to the Israel-Hamas conflict, hint at possible oil price surges should unsettled conditions in the Middle East continue to rise, as indicated by the World Bank.

Since roughly 30% of the world's oil production originates from the Middle Eastern region, intensifying conflicts could escalate oil prices beyond $100 per barrel. Disregarding the potential impact of heightened conflict severity on oil supply, supply cuts initiated by Saudi Arabia and Russia may induce a further spike in oil prices.

Standard Chartered projects Brent prices to reach $98/bbl in 2024, $109/bbl in 2025, and reach a peak of $128/bbl by 2026. According to J.P. Morgan Research, amid soaring oil prices, energy stocks are well-positioned to outperform the broader equities market, as the sector acts as a macro hedge against factors like rising inflation and interest rates, along with geopolitical risks.

Furthermore, investors’ interest in energy stocks is evident from iShares Global Energy ETF’s (IXC) 7.3% returns over the past six months.

Given the industry tailwinds, it's time to examine the fundamentals of the stocks to consider in the energy sector.

Santos Limited (SSLZY)

Headquartered in Adelaide, Australia, SSLZY explores, produces, transports, and markets hydrocarbons. It also produces natural gas, liquefied petroleum gas, ethane, methane, coal seam gas, liquefied natural gas, shale gas, condensate, and oil. Additionally, the company is involved in advancing carbon capture and storage technologies.

On September 19, SSLZY reaffirmed its strategic commitment to the Pikka development in Alaska. The company revealed plans to farm down 50% of its working interest in 148 exploration leases, covering over 270,000 acres of Alaska North Slope lands. This decision arises from a partnership with APA Alaska LLC and Lagniappe Alaska LLC.

This strategic transaction highlights the sustained interest in regional exploration and development projects. Alaska’s North Slope is regarded as a tier-one jurisdiction, boasting supportive stakeholders and promising undeveloped acreage, making it an attractive prospect for SSLZY’s future endeavors.

SSLZY’s forward EV/EBIT of 8.02x is 12.3% lower than the 9.14x industry average. Its forward EV/EBITDA multiple of 4.47 is 18.7% lower than the industry average of 5.49.

SSLZY’s trailing-12-month EBIT and EBITDA margins of 38.03% and 65.43% are 67.8% and 76.6% higher than the industry averages of 22.67% and 37.05%, respectively. Its trailing-12-month cash from operations of $4.05 billion is 496.4% higher than the industry average of $678.95 million.

For the half year that ended June 30, 2023, SSLZY’s revenues from contracts with customers came at $2.97 billion. Its net profit attributable to owners of SSLZY came in at $790 million for the period.

For the fiscal third quarter that ended September 30, 2023, SSLZY’s total sales revenue stood at $1.44 billion. Its production of 23.3 mmboe for the quarter was 2.2% higher than the prior quarter primarily due to increased crude oil production in PNG. Free cash flow from operations stood at $470 million.

For the fiscal year ending December 2023, SSLZY’s revenue is expected to be $6.08 billion.

SSLZY’s shares have declined marginally over the past five days to close the last trading session at $4.47.

SSLZY’s strong fundamentals are apparent in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

SSLZY has a B grade for Value, Momentum, Stability, Sentiment, and Quality. It has ranked #5 within the A-rated 44-stock Foreign Oil & Gas industry.

In addition to the POWR Ratings highlighted above, one can see SSLZY’s ratings (Growth) here.

Ultrapar Participações S.A. (UGP)

Headquartered in São Paulo, Brazil, UGP operates in the energy and infrastructure business. It operates in five segments: Gas distribution (Ultragaz); Fuel distribution (Ipiranga); Chemicals (Oxiteno); Storage (Ultracargo); and Drugstores (Extrafarma).

On August 25, UGP paid a dividend of R$0.25 per common share. Its annualized dividend rate of $0.07 per share translates to a dividend yield of 1.40% on the current share price. Its four-year average yield is 3.06%.

UGP’s forward Price/Sales of 0.21x is 85% lower than the 1.41x industry average. Its forward EV/Sales multiple of 0.28 is 86.6% lower than the industry average of 2.08.

UGP’s trailing-12-month cash per share of $1.10 is 18.9% higher than the industry average of $0.93, while its trailing-12-month asset turnover ratio of 3.65x is 565.8% higher than the industry average of 0.55x.

For the fiscal third quarter that ended September 30, 2023, UGP’s net revenues from sales and services stood at R$32.48 billion ($6.68 billion), while gross profit came at R$2.86 billion ($588.86 million), up 80.9% year-over-year.

For the same quarter, its net income increased 978.9% from the year-ago quarter to R$891.24 million ($183.23 million) and earnings per share stood at R$0.79, up significantly year-over-year. Its adjusted EBITDA stood at R$2 billion ($411.38 million), up 138.7% from the prior year quarter.

Street expects UGP’s EPS in the fiscal year ending December 2023 to increase 167.4% year-over-year to $0.22, while its revenue is expected to come at $25.83 billion.

The stock has gained 49.3% over the past six months to close the last trading session at $5.03. Over the past year, it gained 108.7%.

UGP’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to Strong Buy in our proprietary rating system.

UGP also has an A grade for Value and a B for Sentiment. It is ranked #4 within the Foreign Oil & Gas industry.

To see UGP’s grades for Growth, Momentum, Stability, and Quality, click here.

Martin Midstream Partners L.P. (MMLP)

MMLP provides terminalling, processing, storage, and packaging services for petroleum products and by-products in the United States. The company operates in four segments: Terminalling and Storage; Transportation; Sulfur Services; and Natural Gas Liquids.

MMLP paid a quarterly cash distribution of $0.005 per common unit for the quarter that ended September 30, 2023. Its annualized dividend rate of $0.02 per share translates to a dividend yield of 0.78% on the current share price. Its four-year average yield is 9.55%.

MMLP’s trailing-12-month EV/EBITDA of 5.39x is 6.1% lower than the 5.74x industry average. Its trailing-12-month EV/Sales multiple of 0.70 is 66.4% lower than the industry average of 2.07.

MMLP’s trailing-12-month asset turnover ratio of 1.51x is 176.4% higher than the industry average of 0.55x. Moreover, its trailing-12-month levered FCF margin of 12.83% is 120.8% higher than the industry average of 5.81%.

During the first nine months of 2023, MMLP, utilizing free cash flow and a significant reduction in working capital due to the exit from the butane optimization business, reduced total debt by $53.6 million. As a result, adjusted leverage was decreased to 3.95 times at September 30, 2023, compared to 4.53 times at December 31, 2022.

In the fiscal third quarter that ended September 30, 2023, MMLP’s total revenues stood at $176.70 million. Its operating income came to $14.70 million, compared to an operating loss of $12.24 million in the year-ago quarter. Its adjusted EBITDA increased 39.1% year-over-year to $26.17 million.

For the nine months that ended September 30, 2023, MMLP’s net cash provided by operating activities stood at $106.07 million, compared to net cash used in operating activities of $16.76 million in the prior year period. Moreover, its cash at the end of the period came at $54 million, up 20% year-over-year.

The stock has gained 5.9% over the past month to close the last trading session at $2.50. Over the past six months, it gained 9.7%.

MMLP’s robust outlook is reflected in its POWR Ratings. The stock has an overall rating of A, translating to Strong Buy in our proprietary rating system.

MMLP has a B grade for Growth, Value, and Quality. Within the A-rated 26-stock MLPs - Oil & Gas industry, it is ranked #2.

Beyond what we’ve stated above, we have also rated the stock for Momentum, Stability, and Sentiment. Get all ratings of MMLP here.

What To Do Next?

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SSLZY shares were unchanged in premarket trading Friday. Year-to-date, SSLZY has declined -8.40%, versus a 19.04% rise in the benchmark S&P 500 index during the same period.

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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