Energy remains one of the most talked-about topics in the global context. The Earth is expected to heat up considerably unless significant measures such as transitioning to cleaner energy sources are undertaken. More than 140 countries have set net-zero emission targets, accelerating the transition to renewable energy sources.
Despite adopting renewable energy sources, the demand for oil and gas is unlikely to slow down anytime soon. Moreover, an expected tight supply will likely drive prices higher. Therefore, investors can consider adding fundamentally strong stocks Energy Transfer LP (ET) and Geospace Technologies Corporation (GEOS) to their portfolios.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the energy industry’s prospects.
Companies belonging to the energy sector made record profits last year, benefiting from fears of supply shortages arising out of the embargo on Russian gas and oil supplies due to its invasion of Ukraine. However, with supplies stabilizing, crude oil prices cooled toward the end of last year and during the year's first half of this year.
Although oil prices resumed their upward trend again, breaking the $90 per barrel level for the first time since November 2022, they have again fallen below $90, despite the production restrictions declared by Russia and the OPEC+ countries and the hostilities between Israel and the terrorist organization Hamas.
The IEA has boosted its 2023 oil demand growth forecast to 2.4 million bpd. It also raised its growth forecast to 930,000 bpd in 2024, up from the previous forecast of 880,000 bpd. Meanwhile, OPEC has boosted its global oil demand growth by 20,000 bpd to 2.46 million bpd in 2023. In 2024, it expects demand to rise by 2.25 million bpd.
Additionally, OPEC+ will likely initiate oil supply cuts next year. Furthermore, recent Chinese data and fresh aid to its ailing property sector could boost the demand for crude oil in the near term. Amid tighter supplies and strong demand, oil prices could move higher.
JPMorgan expects a stable market next year and has forecasted an average Brent crude oil price of $83 per barrel. JP Morgan believes world oil demand will reach 106.9 mbd by 2030, a 5.5 mbd rise from 2023.
According to the Energy Information Administration (EIA), U.S. dry natural gas production will average almost 105 billion cubic feet per day (Bcf/d) during the second half of 2023, rising nearly 2 Bcf/d from the year's first half. Growing demand for oil and gas is expected to boost production, thereby benefiting energy services companies.
Wood Mackenzie believes oil and gas exploration spending will recover from historic lows to an average of $22 billion annually over the next five years. Moreover, the global oilfield services market is expected to grow at a CAGR of 5.9% between 2023 and 2030.
Given these industry trends, let’s discuss the fundamentals of the featured stocks.
Energy Transfer LP (ET)
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 terminaling assets.
On November 3, 2023, ET announced the completion of the previously announced merger with Crestwood Equity Partners LP. Post the acquisition; ET will now own and operate more than 125,000 miles of pipelines and related assets in all the major U.S. producing regions and markets across 41 states helping it enhance its leadership position in the midstream sector.
ET’s revenue has grown at a 22.6% CAGR over the past three years and an 8.6% CAGR over the past five years. Its EBITDA has grown at an 8.3% CAGR over the past three years. Its total assets and levered FCF have grown at 4.2% and 250.4% CAGRs over the past three years.
ET’s revenues for the third quarter ended September 30, 2023, came in at $20.74 billion. Its operating income rose 13.2% over the prior-year quarter to $2.23 billion. The company’s net income attributable to partners stood at $584 million. In addition, its net income per common unit came in at $0.15. Also, its adjusted EBITDA increased 14.7% year-over-year to $3.54 billion.
Analysts expect ET’s EPS and revenue for the quarter ending December 31, 2023, to increase 0.4% and 7% year-over-year to $0.34 and $21.93 billion, respectively. The stock has gained 15.2% year-to-date to close the last trading session at $13.67.
ET’s POWR Ratings reflect its solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #6 out of 84 stocks in the Energy – Oil & Gas industry. It has a B grade for Value and Momentum. Click here to see the other ratings of ET for Growth, Stability, Sentiment, and Quality.
Geospace Technologies Corporation (GEOS)
GEOS designs and manufactures instruments and equipment used in the oil and gas industry to acquire seismic data to locate, characterize, and monitor hydrocarbon-producing reservoirs. The company operates through the segments of Oil & Gas Markets, Adjacent Markets, and Emerging Markets.
On August 28, 2023, GEOS launched a new seismic acquisition product, Aquanaut, a continuous, cable-free, four-channel autonomous, deepwater ocean bottom recorder. Aquanaut is the next-gen node for extended ocean bottom seismic data acquisition and features low-frequency geophones. This new product offering should bode well for the company.
On August 15, 2023, GEOS announced a $3 million rental contract with Walker Marine Geophysical, a high-resolution land and marine seismographic surveyor provider that will rent 3,000 new products, Mariner, shallow water seabed wireless seismic data acquisition nodes. The delivery of Mariners is expected to occur in GEOS’ third quarter of the fiscal year 2024.
GEOS’ revenue has grown at a 12.3% CAGR over the past three years and a 10.5% CAGR over the past five years. Its EBITDA has grown at a 52.3% CAGR over the past three years.
For the fiscal fourth quarter, which ended September 30, 2023, GEOS’ total revenue increased 13.3% year-over-year to $29.32 million. Its gross profit rose 142% over the prior-year quarter to $14.23 million. The company’s net income came in at $4.44 million, compared to a net loss of $8.04 million in the prior-year quarter. Also, its EPS came in at $0.33, compared to a loss per share of $0.62 in the year-ago quarter.
The stock has gained 184.1% year-to-date to close the last trading session at $11.99.
GEOS’ POWR Ratings reflect this positive outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
Within the Energy – Services industry, it is ranked #3 out of 49 stocks. It has a B grade for Momentum and Quality. To see the other ratings of GEOS for Growth, Value, Stability, and Sentiment, click here.
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ET shares were trading at $13.72 per share on Wednesday morning, up $0.05 (+0.37%). Year-to-date, ET has gained 27.14%, versus a 20.72% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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