Energy sector investment looks like a great sector for those seeking value stocks. Even though the price of Brent crude oil — the international benchmark price — has jumped 40% this past year and is above $75 per barrel, the Energy Select SPDR ETF is up less than 17% over that time frame. This could indicate that Wall Street is undervaluing oil and gas stocks and that it might be a good opportunity to buy now.
Here’s a look at three companies to watch this quarter: rig company Helmerich & Payne (NYSE:HP), pipeline company Enbridge (NYSE:ENB), and liquefied natural gas company Tellurian (NASDAQ:TELL).
Dividend Yield & Strong Demand Forecast
The oil consolidation that started in mid-2014 hurt demand for Helmerich & Payne’s drill rigs. Its active rig count in the onshore U.S. market, its most important segment, fell drastically from 297 in the first quarter of fiscal 2015 to 87 just a year and half later.
Making things worse, Helmerich & Payne has a track record of ensuring that its fleet of rigs is at the leading edge of the industry. That means spending cash on upgrades, which it did even while demand was weak. That capital spending increases costs, most importantly depreciation.
Now that need for drilling rigs is jumping again, and the company’s rig fleet is well advanced in the upgrade process, Helmerich & Payne is increasing market share as its rigs get back to work. Its active fleet is back up to 227. It has also seen the prices it can charge start to move higher. Management is justifiably optimistic, with analysts, on average, calling for a solid uptick in earnings over the next year.
Lots Of Progress But Still Undervalued?
The stock price of Canadian energy infrastructure leader Enbridge has lost 15% of its value over the past year. That drop comes even at a time when the company has made better-than-expected advancements on its strategic plan. That makes the stock a compelling bargain to consider buying this month, especially considering the growth it has coming down the pipeline.
Heading into 2018, Enbridge expects that it could grow earnings 15% this year and at a 10% compound annual rate through 2020, fueled by the roughly USD$15.3 billion of expansion jobs it had under construction. Additionally, the company expects to sell about USD$2.3 billion in noncore assets by year’s end, which would bump up its leverage ratio to a more comfortable 5.0 times debt to EBITDA.
Even with that progress, shares of Enbridge currently sell for just 10.5 times free cash flow, which is well below the 12.5 times average of its pipeline peers. Add that ultra-cheap price to the company’s 6%-yielding dividend and compelling growth prospects, and Enbridge is one of the top energy stocks to buy this month.
New Catalyst For This Energy Play?
Tellurian is a stock what could have strong potential over the next few years. Even though the company’s business plan has yet to make it off the ground, the basics are there for Tellurian to create a liquefied natural gas export terminal over the next several years. One thing that could make this stock so interesting is the fact that so much of the company’s outlook will be decided over the next few months.
Tellurian is searching for a new way to get a facility off the ground in the U.S. Previously, companies like Cheniere Energy marketed long-term takeaway contracts to customers that locked them into relatively low prices and removed commodity price risk for the exporter. Companies then used those contracts as a proof-of-concept that enabled them to go to the market for funding, mostly in the form of debt.
Obtaining that permit and announcing its equity partners in the project are two major catalysts that will determine much of its future. If both of these things happen in the next six months, then we can expect Tellurian to get the green light to build its facility. These two events could mean big things for this stock and getting in now could mean big returns for investors.
Why Were Refining Stocks Under Pressure In May?
Last month, many industries went into turmoil and one of those was the oil refinery industry. This was due to the global events that shook up the capital markets. Some of the better-known oil refiner stocks like Marathon Petroleum (MPC), Phillips 66 (PSX) and Valero Energy (VLO) took a nosedive. According to information from S&P Global Market Intelligence, the declines for the month ranged from 12% to 23%.
There is a number of factors which are responsible for the decline in oil refinery stocks for the month of May. Perhaps the biggest reason is the escalating trade tensions between the United States and China.
It was in May that the talks broke down between the two nations and the tariff wars started yet again. The trade standoff has resulted in a significant drop in the demand for refined oil products. Consequently, the profit margins of the major oil refinery companies were hit.
However, in addition to the trade war with China, the United States had also threatened to impose tariffs on Mexican goods if the immigration issue was not tackled. That was another negative trigger for oil refinery stocks since a hike in tariffs would force Mexico to send a lower quantity of crude oil to the United States and the refinery companies would need to look at more expensive sources. On top of that, the current issues in the middle east have not helped the matter either.
The major companies in the industry reported significant drops in their earnings, with Valero’s earnings nose-diving by 41%, while Phillips 66 recorded a 50% drop in earnings. On the other hand, Marathon Petroleum earned $11.17 for each barrel in the first quarter as opposed to analysts’ estimates of $13.85 per barrel. The margins were hit due to higher oil prices.
Despite the troubles that the companies went through in May, the future may not be as gloomy. One analyst stated that Valero and Phillips 66 could be a good prospect for investors since the stocks are being weighed down by trade issues rather than any fundamental problem with margins. In fact, JP Morgan has already upgraded Valero and classified it under overweight.
Where Will Oil Go After This Week’s Price Hit?
Even though oil had been taking a beating over the last 2 trading sessions, its price rose to $69 per barrel on Friday. However, oil prices are experiencing the worst week of 2019 mainly due to potential economic slowdown and ever-growing oil inventories. US oil inventories have not been this high since July of 2017. And to top it all off, the trade war between the US and China is growing wearier every day further affecting oil prices.
Naeem Aslam, the chief market analyst at TF Global Markets, stated, “Clearly, bargain hunters are back in town.” He later added, “However, it is still set to record the worst week of the year and this is due to the increase in trade war tensions between the U.S. and China.”
The global benchmark for oil, Brent Crude, has experienced a decrease of 5 percent this week. However, Brent Crude this morning climbed $0.98 to value each barrel at $68.74. Due to US sanctions and voluntary supply cuts, a floor under prices held. Market analysts are expecting the oil market to recover off of the price floor.
“It is reasonable to doubt whether Saudi Arabia will be willing to step up its output given the latest decline in prices, […] we therefore expect to see higher oil prices again in the near future,” Explain analysts at Commerzbank.
In order to make the market tighter, the Organization of the Petroleum Exporting Countries has been cutting oil supplies since the beginning of the year.
Brent Crude’s prices reflect that the supply and demand of oil is tightly knit. According to UBS, Brent Crude should get back to $75 this month as supply gets tighter and tighter.
“Compliance of OPEC and its allies to the production cut deal remains high, while production from Iran and Venezuela is likely to again trend lower this month,” explains analyst Giovanni Staunovo,
Renewable Energy Drives Power And Utility Merger Activity
As has been advocated by a range of energy experts across the world, renewable energy could be positioned to go mainstream. More are pushing to save the planet from things like global warming. As of now, the indications are there that at a global level, renewable energy is growing.
According to available data, the renewable energy market was the frontrunner in the global energy market. The biggest reason for the growth was strategic mergers and acquisitions. It is a particularly significant development. The fact remains: mergers and acquisitions have largely slowed down across the world within the industry.
According to a report by global consultancy firm Ernst & Young, “Power Transactions and Trends for the first fiscal quarter of 2019,” renewable energy mergers and acquisitions grew at an impressive rate. The total value of mergers and acquisitions rose by $3.7 billion from the fourth quarter of 2018.
It is noteworthy that the mergers and acquisitions in this niche accounted for a whopping 61% of all deals in the power and utility industry in Q1 2019. At the same time, mergers and acquisition activity had declined at a global level in the quarter. This decreased by as much as 33% from the $20.4 billion in Q4 2018.
Despite the overall decline in the merger and acquisition activity, executives are confident that things will pick up soon. According to an industry-wide survey, 92% of the executives believe that economic growth at a global level is going to increase. The same percentage of executives also think that the power and utility sector itself will grow in the coming months.
It’s far more important to point out that 97% of the respondents in the survey stated that they are going to make major investments this year. Much of that might go towards modern technology.
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