Oil prices surged recently, driven by the escalating tensions in the Middle East. Moreover, supply constraints, coupled with bullish oil demand forecasts from the OPEC and International Energy Agency (IEA) for 2024, could propel oil prices higher.
Given the industry’s prospects, in this piece, we evaluate three energy stocks to shed light on how they can help an investor capitalize on the prevailing industry tailwinds.
Therefore, energy stocks DNOW Inc. (DNOW) and Permianville Royalty Trust (PVL) could be wise portfolio additions, given their solid profitability. Conversely, it would be best to avoid Antero Resources Corporation (AR), given its weak fundamentals.
Before delving deeper into the fundamentals of the three stocks, let’s take a quick look at the industry landscape.
The IEA forecasts that global oil demand will surge by 1.24 million barrels per day (bpd) in 2024. The improving global economic growth and the burgeoning petrochemical sector in China fuel this upward trend.
Moreover, OPEC anticipates oil demand to grow by 2.25 million barrels per day to 104.36 million barrels daily in 2024 and an increment of 1.85 million barrels per day to 106.21 million barrels daily in 2025.
Furthermore, as the geopolitical tensions in the Middle East escalated, U.S. crude oil prices and the global benchmark Brent increased. Besides the Middle East tensions, the recent oil output disruption in Libya, OPEC+ output cuts, and slower U.S. oil production could compound the situation, potentially pushing Brent crude oil prices even higher.
In light of these encouraging trends, let's look at the fundamentals of the three energy sector stocks, starting with the weakest from the investment point of view.
Antero Resources Corporation (AR)
AR develops, produces, explores, and acquires natural gas, natural gas liquids (NGLs), and oil properties in the U.S. It operates through three segments: Exploration, Development and Production of Natural Gas, NGLs and Oil; Marketing and Utilization of Excess Firm Transportation Capacity; and Midstream Services Through their Equity Method Investment in Antero Midstream.
AR’s trailing-12-month asset turnover ratio of 0.37x is 32.6% lower than the industry average of 0.55x. Its trailing-12-month ROCE, ROTC, and ROTA of 13.44%, 7.01%, and 6.39% are 30.7%, 20.5%, and 12.6% lower than the industry averages of 19.38%, 8.82%, and 7.31%, respectively.
For the fiscal third quarter that ended September 30, 2023, AR’s total revenue and operating income stood at $1.13 billion and $55.73 million, down 45.5% and 92.8% year-over-year, respectively. Moreover, its adjusted EBITDAX declined 69.1% from the year-ago quarter to $271.20 million.
For the same quarter, its adjusted net income and income per share stood at $25.49 million and $0.06, down 95.2% and 96.5% from the prior-year quarter, respectively.
Street expects AR’s revenue and EPS for the fiscal first quarter ending March 2024 to decline 20.8% and 47.9% year-over-year to $1.12 billion and $0.26, respectively.
The stock has declined 23.4% over the past six months to close the last trading session at $21.63. Over the past three months, it has declined 19.1%.
AR’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has an F grade for Growth and a D for Stability, Sentiment, and Quality. Within the 15-stock F-rated Energy – Drilling industry, it is ranked last.
To see additional POWR Ratings for Value and Momentum for AR, click here.
DNOW Inc. (DNOW)
DNOW distributes downstream energy and industrial products for petroleum refining, chemical processing, LNG terminals, power generation utilities, and industrial manufacturing operations in the U.S., Canada, and internationally. It operates under the DistributionNOW and DNOW brands.
On February 6, DNOW acquired Whitco Supply, LLC, a supplier of energy products and solutions to the midstream market, in an all-cash transaction, subject to regulatory approvals and other customary closing conditions. The acquisition of Whitco Supply aligns with the company’s strategic objectives to diversify end markets. This transaction would enhance DNOW’s earnings and free cash flow profile and strengthen its ability to increase shareholder value.
DNOW repurchased $5 million of common stock in the third quarter of 2023, justifying the company’s top priority of shareholder value maximization.
DNOW’s trailing-12-month asset turnover ratio of 1.74x is 116.7% higher than the industry average of 0.80x. Its trailing-12-month ROCE, ROTC, and ROTA of 15.11%, 11.20%, and 9.59% are 24%, 64.4%, and 98.2% higher than the industry averages of 12.18%, 6.81%, and 4.84%, respectively.
For the fiscal third quarter that ended September 30, 2023, DNOW’s revenue increased 1.9% year-over-year to $588 million, while its operating profit stood at $37 million. Moreover, its non-GAAP EBITDA excluding other costs stood at $46 million.
For the same quarter, non-GAAP net income attributable to DNOW excluding other costs and non-GAAP earnings per share attributable to DNOW stockholders excluding other costs stood at $28 million and $0.25, respectively. As of September 30, 2023, DNOW’s total current liabilities stood at $423 million, compared to $439 million as of December 31, 2022.
Street expects DNOW’s revenue and EPS for the fiscal year ending December 2024 to increase 3.3% and 7.1% year-over-year to $2.38 billion and $0.99, respectively. The company surpassed consensus revenue and EPS estimates in three of the trailing four quarters, which is impressive.
The stock has gained 1.7% intraday to close the last trading session at $9.78. Over the past nine months, it has gained 3.5%.
DNOW’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
DNOW has an A grade for Value and a B for Momentum. Within the 51-stock Energy Services industry, it is ranked #7.
Beyond what we’ve stated above, we have also rated the stock for Growth, Stability, Sentiment, and Quality. Get all ratings of DNOW here.
Permianville Royalty Trust (PVL)
PVL operates as a statutory trust. It acquires and holds net profits interest, representing the right to receive 80% of the net profits from the sale of oil and natural gas production from properties located in the states of Texas, Louisiana, and New Mexico.
On November 22, 2023, PVL paid a special cash distribution to the holders of its units of beneficial interest of $0.08 per unit. This special distribution represents the majority of the remaining net proceeds allocable to PVL unitholders from the divestiture of certain oil and natural gas properties in the Permian Basin that constituted part of the properties burdened by the PVL’s 80% net profits interest.
The total closing proceeds received by the Sponsor from the Divestiture Properties, after preliminary closing adjustments, were approximately $6.70 million before accounting for the incremental $0.30 million of partial expense reimbursement associated with the proxy solicitation.
PVL’s trailing-12-month ROTA of 24.28% is 231.9% higher than the industry average of 7.31%. Its trailing-12-month EBIT and net income margins of 93.51% and 91.10% are 342.8% and 608.8% higher than the industry averages of 21.12% and 12.85%, respectively.
For the fiscal third quarter that ended September 30, 2023, PVL’s total gross profits and net profits allocable to net profits interest stood at $13.99 million and $2.85 million, respectively. For the same quarter, its distributable income and distributable income per unit stood at $2.48 million and $0.08, respectively.
As of September 30, 2023, PVL’s cash and cash equivalents stood at $1.33 million, compared to $922.91 thousand as of December 31, 2022.
The stock has gained 11.8% year-to-date to close the last trading session at $1.61. Over the past month, it has gained 4.6%.
PVL’s robust prospects are reflected in its POWR Ratings. The stock has an overall B rating, equating to Buy in our proprietary rating system.
PVL has a B grade for Value, Momentum, Sentiment, and Quality. It is ranked #5 within the 82-stock Energy – Oil & Gas industry.
Click here for the additional POWR Ratings for PVL (Growth and Stability).
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
AR shares fell $0.17 (-0.79%) in premarket trading Friday. Year-to-date, AR has declined -5.38%, versus a 5.28% rise in the benchmark S&P 500 index during the same period.
About the Author: Neha Panjwani
From her school days, Neha harbored a profound fascination for finance, a passion that steered her toward a career as an investment analyst following the completion of her bachelor's degree in commerce. Currently enrolled in the CFA program, Neha is dedicated to further enriching her comprehension of investment fundamentals. Neha's primary objective is to aid retail investors in discerning optimal investment opportunities by diligently evaluating crucial aspects of financial instruments, with a primary focus on stocks and ETFs. Her commitment lies in empowering individuals to make informed and strategic investment decisions in the dynamic world of finance.
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