Amid the mounting global energy needs and constrained supply levels, crude oil prices are projected to adhere closely to 2023's averages. The potential for price spikes is real due to aggravated geopolitical instability, exemplified by increasing turbulence in the Middle East and maritime assaults occurring in the Red Sea region.
Given this backdrop, quality energy stocks Cheniere Energy Partners, L.P. (CQP), Ultrapar Participações S.A. (UGP), and Transportadora de Gas del Sur S.A. (TGS) could be solid portfolio additions now.
While the transition toward renewable energy sources continues to accelerate, there is a simultaneous rise in oil and gas requirements. According to the International Energy Agency's (IEA) monthly report, 2024 can expect to witness oil demand growth by 1.24 million barrels per day (bpd). This optimistic forecast can be attributed to population growth, escalating energy consumption in developing economies, improving global economic health, declining crude oil prices in the last quarter, and sustained growth in China's petrochemical sector.
Significant investments in oil and gas drilling technologies, including hydraulic fracturing and horizontal drilling, have generated a notable spike in oil and gas production in the U.S. It's worth noting that these innovations have enabled heightened yields from reservoirs once deemed non-productive.
In 2023, Master Limited Partnerships and the broader midstream sector demonstrated robust performance within the energy industry, generating total returns of 23.8% and 14%, respectively. The prediction for 2024 suggests that the industry will continue to yield free cash flow and distribute capital to shareholders through enhanced dividends and strategic buybacks.
The persisting geopolitical turmoil in the Red Sea region, particularly the ongoing militant attacks by Yemen-based Houthis, has imposed additional challenges on oil trade activities. Also, the OPEC+ production cuts, combined with production disruptions in Libya, have amplified bullish market conditions for oil prices.
Moreover, in the U.S., severe winter weather across Texas and North Dakota has notably hindered oil production. For instance, North Dakota's oil output experienced a substantial drop last week. This tightening of supply, coupled with increased oil and gas demand, has contributed to recent surges in oil prices.
The U.S. Energy Information Administration (EIA), in its Short-Term Energy Outlook (STEO), anticipates Brent crude oil prices to average at $82 per barrel (b) for 2024, dropping to $79/b in 2025.
With these trends in mind, let's delve into the fundamentals of the three energy stock picks.
Cheniere Energy Partners, L.P. (CQP)
CQP provides liquefied natural gas (LNG) to integrated energy companies, utilities, and energy trading companies worldwide. It owns and operates a natural gas liquefaction and export facility at the Sabine Pass LNG production terminal.
On November 29, CQP announced that Sabine Pass Liquefaction Stage V, LLC (SPL Stage 5) entered into a long-term Integrated Production Marketing (IPM) gas supply agreement with ARC Resources U.S. Corp., Canada’s leading natural gas producer.
Under the IPM agreement, ARC Resources would sell 140,000 MMBtu per day of natural gas to SPL Stage 5 for 15 years, commencing with commercial operations of the first train of the SPL expansion project. This agreement will enable CQP to deliver increased quantities of Canadian natural gas to Europe, where energy security has never been more crucial.
On November 14, CQP paid the unitholders a cash distribution of $1.03 per common unit. Its annualized dividend rate of $3.10 per share translates to a dividend yield of 6.13% on the current share price.
Its four-year average yield is 7.24%. CQP’s dividend payments have grown at CAGRs of 6.5% and 7.2% over the past three and five years, respectively. The company has a record of paying dividends for 16 consecutive years.
CQP’s trailing-12-month cash from operations of $3.90 billion is 457.2% higher than the industry average of $699.98 million. Its trailing-12-month ROTC and ROTA of 29.37% and 32.42% are 216.6% and 342.3% higher than the industry averages of 9.28% and 7.33%, respectively.
Over the past three and five years, its revenue grew at CAGRs of 24.4% and 14.1%, respectively, while its EBITDA grew at 39.2% and 24.9% CAGRs over the same periods.
In the fiscal third quarter that ended September 30, 2023, CQP’s total revenues and adjusted EBITDA stood at $2.13 billion and $793 million, respectively. Moreover, its income from operations stood at $988 million, compared to a loss from operations of $299 million in the year-ago quarter.
For the same quarter, net income came at $791 million, compared to a net loss of $514 million in the prior year quarter, while net income per common unit stood at $1.19, compared to a net loss per common unit of $1.49 in the year-ago quarter.
Street expects CQP’s revenue and EPS for the fiscal first quarter ending March 2024 to be $2.66 billion and $1.16, respectively.
The stock has gained 13% over the past nine months to close the last trading session at $51.19. Over the past six months, it has gained 2%.
CQP’s POWR Ratings reflect its robust prospects. The stock has an overall B rating, equating to Buy 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 a B grade for Value, Momentum, and Quality. Within the A-rated MLPs – Oil & Gas industry, it is ranked #7 out of 26 stocks.
To see additional POWR Ratings for Growth, Stability, and Sentiment for CQP, click here.
Ultrapar Participações S.A. (UGP)
Headquartered in São Paulo, Brazil, UGP offers compressed natural gas, renewable power, and liquefied petroleum gas to residential, commercial, and industrial customers. In addition, it markets and distributes lubricants, natural gas for automobiles, ethanol, diesel, fuel oil, kerosene, and gasoline.
It pays an annual dividend of $0.07 per share, which translates to a dividend yield of 1.25% on the current share price. Its four-year average yield is 3.01%.
UGP’s trailing-12-month cash per share of $1.10 is 18.4% higher than the industry average of $0.93, while its trailing-12-month asset turnover ratio of 3.65x is 564.8% higher than the industry average of 0.55x.
Over the past three and five years, its revenue grew at CAGRs of 16.3% and 7.7%, respectively, while its tangible book value grew at 11.5% and 9.1% CAGRs over the same periods.
For the fiscal third quarter that ended September 2023, UGP’s net revenues came at R$32.48 billion ($6.52 billion), while its adjusted EBITDA rose 138.7% from the year-ago quarter to R$ 2 billion ($401.68 million).
Also, the company’s net income and cash inflow from operations grew 973.5% and 47% from the prior year’s period to R$ 891.20 million ($178.99 million) and R$ 1.90 billion ($381.79 million), respectively.
Street expects UGP’s EPS for the fiscal year of 2023 (ended December 2023) to increase 167.4% year-over-year to $0.22. Its revenue is expected to be $25.76 billion for the same year.
The stock has gained 129.3% over the past year to close the last trading session at $5.64. Over the past nine months, it has gained 98.6%.
UGP’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
UGP has a B grade for Value and Sentiment. It is ranked #2 out of 43 stocks within the B-rated Foreign Oil & Gas industry.
In addition to the POWR Ratings I’ve highlighted, you can see UGP’s Growth, Momentum, Stability, and Quality ratings here.
Transportadora de Gas del Sur S.A. (TGS)
TGS, headquartered in Buenos Aires, Argentina, transports natural gas and produces and commercializes natural gas liquids in Argentina. The company has four segments: Natural Gas Transportation Services; Liquids Production and Commercialization; Other Services; and Telecommunications.
TGS’ trailing-12-month CAPEX/Sales of 37.28% is 178% higher than the industry average of 13.41%.
Over the past three and five years, its revenue grew at CAGRs of 20.1% and 24.7%, respectively, while its tangible book value grew at 108.8% and 165.3% CAGRs over the same periods.
In the fiscal third quarter that ended September 30, 2023, TGS’ revenues and operating profit stood at ARS 74.59 billion ($90.78 million) and ARS 17.29 billion ($21.04 million), respectively.
For the same quarter, its total comprehensive income and earnings per ADS stood at ARS 4.88 billion ($5.94 million) and ARS 32.43, respectively. Moreover, its free cash flow stood at ARS 3.04 billion ($3.70 million).
Street expects TGS’ revenue and EPS for the fiscal year of 2023 (ended December 2023) to be $675.21 million and $0.31, respectively. The company surpassed consensus EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 42.4% over the past nine months to close the last trading session at $14.60. Over the past year, it has gained 35.9%.
TGS’ POWR Ratings reflect a positive outlook. The stock has an overall B rating, which indicates a Buy in our proprietary rating system.
TGS has a B grade for Momentum, Sentiment, and Quality. Within the Foreign Oil & Gas industry, it is ranked #4.
Click here for TGS’ additional POWR Ratings (Growth, Value, 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.
CQP shares were unchanged in premarket trading Wednesday. Year-to-date, CQP has gained 2.81%, versus a 2.01% 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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