2024 Energy Watchlist Unveiled
Despite the shift toward more sustainable energy solutions, escalating demand for oil and gas coupled with supply reductions and geopolitical instability may trigger a significant surge in prices, leading to a considerable revitalization of the energy industry. To that end, energy stocks Hess Midstream LP (HESM), CrossAmerica Partners LP (CAPL), MRC Global (MRC), and Precision Drilling Corporation (PDS) could be ideal watchlist additions. Read on….
With escalating global energy demands and constricted supply levels, crude oil prices in 2024 are predicted to remain closely aligned with those of the previous year. Additionally, potential surges could occur amid heightened geopolitical instability, including escalating conflicts in the Middle East and seaborne attacks within the Red Sea zone.
Amid this backdrop, it could be wise to add quality oil and gas stocks Hess Midstream LP (HESM), CrossAmerica Partners LP (CAPL), MRC Global Inc. (MRC), and Precision Drilling Corporation (PDS) to your watchlist in 2024.
Although the shift toward renewable energy continues to gain momentum, oil and gas demand is concurrently rising. The IEA’s monthly report anticipates an oil demand growth of 1.24 million barrels per day (bpd) in 2024. The upward projection is being attributed to improving global economic health and the declining crude oil prices during the last quarter, complemented by continued expansion in China’s petrochemical industry.
Increased investment in oil and gas drilling technologies such as hydraulic fracturing and horizontal drilling has led to a significant uptick in the oil and gas extraction industry’s output in the U.S. It’s noteworthy that these innovations enabled enhanced yields from reservoirs previously considered barren.
In 2023, Master Limited Partnerships and the broader midstream sector exhibited solid performance within the energy sector, yielding total returns of 23.8% and 14%, respectively. Looking forward to 2024, the industry is set to consistently generate free cash flow and return capital to shareholders through increased dividends and strategic buybacks.
The ongoing geopolitical disturbances in the Red Sea region – the continuous attacks by Yemen-based Houthi militants, have introduced additional challenges to oil trading activities. In addition, OPEC+ production cuts, combined with disruptions in oil production in Libya, have bolstered a bullish environment for oil prices.
The U.S. Energy Administration (EIA), in its Short-Term Energy Outlook (STEO), forecasts Brent crude oil prices to average at $82 per barrel (b) for 2024 and fall slightly to $79/b in 2025, resonating closely with the 2023 average of $82/b.
Given the industry tailwinds, it’s time to examine the fundamentals of the four stocks to watch in the energy industry.
Hess Midstream LP (HESM)
HESM owns, develops, operates, and acquires midstream assets, including natural gas and crude oil gathering systems, processing plants, storage facilities, and terminal assets across three segments: Gathering; Processing & Storage; and Terminaling & Export.
On November 14, 2023, HESM announced that it was set to repurchase approximately $100 million worth of Class B units through its subsidiary from sponsors Hess Corporation and Global Infrastructure Partners.
The move aims to enhance distributable cash flow per Class A share and supports the ongoing return of capital to shareholders, with $1.55 billion returned through unit repurchases since 2021. The transaction closed on November 16, 2023.
The company pays $2.47 annually as dividends, which translates to a yield of 7.69% on the prevailing price level. Its four-year average dividend yield is 8.08%. Its dividend payments have grown at CAGRs of 11% and 11.8% over the past three and five years, respectively.
HESM’s trailing-12-month EBIT margin of 61.47% is 188.5% higher than the industry average of 21.31%. Moreover, its trailing-12-month levered FCF margin of 29.67% is 413.9% higher than the industry average of 5.77%.
In the fiscal third quarter ended September 2023, HESM generated total revenues of $363.10 million, up 8.5% year-over-year. The company’s net income and adjusted EBITDA grew 3.4% and 6.9% from the prior-year quarter to $164.80 million and $271 million, respectively. Net income attributable to HESM per Class A share increased 7.5% year-over-year to $0.57.
For the fourth quarter of 2023, the company expects net income to be around $160 million and adjusted EBITDA to be approximately $270 million.
Street expects HESM’s revenue and EPS to grow 20.7% and 45.8% year-over-year to $368.11 million and $0.69, respectively, for the fiscal first quarter ending March 2024.
HESM’s shares have gained 13.3% over the past nine months to close the last trading session at $32.13. It gained 4.5% over the past three months.
HESM’s POWR Ratings reflect an optimistic outlook. The stock 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.
The stock has a B grade for Growth, Momentum, and Quality. Within the A-rated MLPs – Gas industry, it is ranked first of two stocks.
For HESM’s additional Value, Stability, and Sentiment ratings, click here.
CrossAmerica Partners LP (CAPL)
CAPL is involved in the wholesale distribution of motor fuels, operation of convenience stores, and ownership and leasing of real estate used in the retail distribution of motor fuels. The company operates through Wholesale and Retail segments.
On November 10, CAPL paid a quarterly dividend of $0.5250 per unit to all unitholders attributable. Its annualized dividend rate of $2.10 per share translates to a dividend yield of 9.11% on the current share price. Its four-year average yield is 11.44%.
CAPL’s trailing-12-month asset turnover ratio of 3.42x is 519.5% higher than the industry average of 0.55x. Moreover, its trailing-12-month ROCE of 102.13% is 415.4% higher than the industry average of 19.81%.
In the fiscal third quarter that ended September 30, 2023, CAPL’s operating revenues and gross profit stood at $1.21 billion and $100.44 million, respectively. Moreover, its adjusted EBITDA stood at $44.21 million.
For the same quarter, net income available to limited partners and earnings per common unit stood at $11.66 million and $0.31, respectively. Also, as of September 30, 2023, the company’s total current assets stood at $123.26 million, compared to $118.41 million as of December 31, 2022.
CAPL’s revenue for the fiscal first quarter ending March 2024 is expected to grow 11.4% year-over-year to $1.13 billion, while EPS for the same quarter is expected to come at $0.12. The company surpassed consensus EPS estimates in three of the trailing four quarters.
The stock has gained 9.4% over the past year and 20% over the past six months to close the last trading session at $23.04.
CAPL’s robust prospects are reflected in its POWR Ratings. The stock has an overall A rating, equating to a Strong Buy in our proprietary rating system.
CAPL has an A grade for Growth and Sentiment and a B for Stability. It is ranked #2 out of 26 stocks within the A-rated MLPs – Oil & Gas industry.
Beyond what we’ve stated above, to see the additional ratings for Value, Momentum, and Quality, click here.
MRC Global Inc. (MRC)
MRC distributes pipes, valves, fittings, and other infrastructure products and services to the gas utility, energy, and industrial end-markets in the United States, Canada, and internationally. In addition, it offers natural gas distribution products and oilfield and industrial supplies.
On September 27, MRC Global (US) Inc., an MRC subsidiary, extended its Enterprise Framework Agreement with Shell plc (SHEL) until the year 2028. Under this global agreement, MRC will continue to serve as a crucial provider of pipe, valves, and fittings, along with on-demand valve actuation services for SHEL across its upstream, midstream, and downstream assets.
Prominent initiatives currently assisted by MRC comprise SHEL’s Holland Hydrogen 1 project, set to become the largest green hydrogen plant in Europe, and the Red II Green project situated in The Netherlands.
MRC’s trailing-12-month ROCE of 21.79% is 77.8% higher than the 12.25% industry average. Likewise, its trailing-12-month asset turnover ratio of 1.81x is 123.6% higher than the 0.81x industry average.
For the fiscal third quarter, which ended on September 30, 2023, MRC’s sales amounted to $888 million, while its gross profit rose 10.9% from the year-ago value to $183 million.
In addition, its operating income grew 26.7% from the prior-year quarter to $57 million. The company’s net income and EPS came in at $35 million and $0.33, up 45.8% and 57.1% year-over-year, respectively.
Street expects MRC’s revenue and EPS for the fiscal first quarter ending March 2024 to come at $847.75 million and $0.27, respectively. Additionally, the company’s EPS is projected to improve by 15% annually over the next five years.
Over the past nine months, MRC’s shares have surged 7.6% to close the last trading session at $10.23.
MRC’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.
It has an A grade for Momentum and a B for Value. Within the 52 stocks in the Energy – Services industry, it is ranked #3.
Click here to see the other ratings of MRC for Growth, Stability, Sentiment, and Quality.
Precision Drilling Corporation (PDS)
Headquartered in Calgary, Canada, PDS provides onshore drilling, completion, and production services primarily to oil and natural gas and geothermal exploration and production companies in North America and the Middle East. The company operates through two segments: Contract Drilling Services and Completion and Production Services.
Over the past two years, PDS reduced its debt by $258 million and lowered the net debt to adjusted EBITDA leverage ratio1, which the company expects to be below 1.5 times as at December 31, 2023. The company is well on track to exceed its long-term debt reduction target of repaying $500 million between 2022 and 2025 and reaching a sustained net debt to adjusted EBITDA leverage ratio of below 1.0 times by the end of 2025.
During 2023, PDS returned $30 million to shareholders through share repurchases under its Normal Course Issuer Bid and as at December 31, 2023, had 14,336,539 shares outstanding. With a robust free cash flow outlook, it plans to improve its capital returns to shareholders in 2024 by increasing debt reduction and share buyback allocations.
In November, PDS acquired CWC Energy Services Corp. for C$127 million ($94.55 million). CWC’s total consideration included 947,807 PDS common shares, roughly C$14 million ($10.42 million) cash, and the undertaking of CWC’s net debt of approximately C$38 million ($28.29 million), excluding transaction costs.
The strategic acquisition is set to position PDS as a leading well service provider within Canada and optimize its drilling operations in Canada and the U.S. markets. With the expected synergies from the transaction, PDS anticipates accretion on a 2024 cash flow per share basis and believes this move will support its continuous deleveraging plan.
As of September 30, the company reduced its total debt by C$126 million ($93.81 million) and returned C$13 million ($9.68 million) to shareholders through share repurchases.
PDS’ trailing-12-month cash per share of $2.65 is 193.9% higher than the industry average of $0.90, while its trailing-12-month asset turnover ratio of 0.68x is 23.7% higher than the industry average of 0.55x.
In the fiscal third quarter that ended September 30, 2023, PDS’ revenue increased 4.1% year-over-year to C$446.75 million ($332.61 million), while adjusted EBITDA stood at C$114.58 million ($85.30 million). Also, cash provided by operations stood at C$88.50 million ($65.89 million), an increase of 987% year-over-year.
Furthermore, the company’s net earnings and net earnings per share came at C$19.79 million ($14.74 million) and C$1.45, respectively. As of September 30, 2023, PDS’ total current assets stood at C$477.40 million ($355.42 million), compared to C$470.67 million ($350.41 million) as of December 31, 2022.
Street expects PDS’ EPS in the fiscal first quarter ending March 2024 to come at $2.63. Its revenue is expected to increase 1.5% year-over-year to $415.75 million. The company surpassed consensus revenue estimates in three of the trailing four quarters.
The stock has gained 2% over the past month to close the last trading session at $55.61. Over the past nine months, it has gained 8.6%.
It’s no surprise that PDS has an overall rating of B, which equates to Buy in our proprietary rating system.
It has a B grade for Growth, Value, Momentum, and Quality. Within the 15-stock Energy – Drilling industry, it is ranked first.
In addition to the POWR Ratings we stated above, we have also given PDS ratings for Stability and Sentiment. Get all PDS ratings here.
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HESM shares were unchanged in premarket trading Monday. Year-to-date, HESM has gained 1.58%, versus a 1.50% 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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