The energy sector powers the global economy. With oil and natural gas prices increasing, now is an opportune moment to invest in quality energy stocks Western Midstream Partners, LP (WES), NuStar Energy L.P. (NS), and Graham Corporation (GHM) to capitalize on the industry tailwinds.
This year, oil prices have received backing from escalating geopolitical tensions in the Middle East and the attacks by the Iran-aligned Houthi group on Red Sea shipping.
Besides, investor sentiment towards oil and gas prices has shifted, with a decrease in bearishness. This change comes as U.S. shale producers reduce drilling activities, coupled with Saudi Arabia and its OPEC+ allies extending output cuts for an additional three months.
In addition, as per U.S. Energy Information Administration’s (EIA) latest data, the U.S. oil and gas production hit new seasonal highs in December last year, capping an unprecedented year. Despite price slumps following Russia’s invasion of Ukraine in mid-2022, production continued to rise, leading to inventory accumulation.
Moreover, daily production reached 13.3 million barrels, marking a 10% increase from the previous year. Overall, 2023 saw a substantial output rise to 4.72 billion barrels, doubling since 2012, despite a brief drop in late December 2022 due to extreme cold causing well freeze-offs.
Looking ahead, according to energy research company Wood Mackenzie, global oil demand is projected to increase by 1.90 million barrels per day this year.
Further, the United States transformed from a minimal gas exporter to the world’s top supplier in just eight years, a significant shift benefiting oil and gas firms while bolstering American influence globally. On top of it, the U.S. is expected to nearly double its export capacity by 2027 thanks to already permitted and under-construction projects.
In light of these encouraging trends, let's look at the fundamentals of the three energy stocks.
Western Midstream Partners, LP (WES)
WES operates as a midstream energy company primarily in the United States. It is involved in gathering, compressing, treating, processing, and transporting natural gas, natural gas liquids, and crude oil.
On February 21, WES announced the execution of agreements to divest its remaining interest in various assets, including the Marcellus Interest gathering system, Saddlehorn Pipeline Company LLC, Whitethorn Pipeline Company LLC, Panola Pipeline Company LLC, and Enterprise EF78 LLC.
The aggregate proceeds from these divestments amount to $790 million, which should boost the company’s liquidity.
On February 13, 2024, WES paid a quarterly distribution of $0.58 per unit. The company’s annual dividend of $2.30 translates to a 6.78% yield on the prevailing price level, while its four-year average dividend yield is 11.05%. Its dividend payouts have grown at a CAGR of 21.2% over the past three years.
For the fiscal fourth quarter, which ended on December 31, 2023, WES’ total revenues and other income came in at $858.21 million, up 10.1% year-over-year. Its operating income amounted to $391.92 million. Moreover, the company’s net income stood at $295.75 million and $0.74 per share.
Street expects WES’ EPS to rise 59.6% year-over-year to $0.83 in the fiscal first quarter ending March 2024. Its revenue in the same quarter is expected to rise 22.7% from the year-ago quarter to $900.70 million.
Over the past nine months, the stock has climbed 29.8% to close the last trading session at $33.90.
WES’ POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has a B grade for Quality, Momentum, and Growth. Among the 24 stocks within the A-rated MLPs – Oil & Gas industry, it is ranked #10.
In addition to the POWR Ratings stated above, one can access WES’ Value, Stability, and Sentiment here.
NuStar Energy L.P. (NS)
NS engages in the transportation terminalling and storage of petroleum products and renewable fuels, and transportation of anhydrous ammonia in the United States and internationally. It operates through Pipeline; Storage; and Fuels Marketing segments.
On February 13, NS paid a fourth-quarter common unit distribution of $0.40 per unit. The company also declared a fourth quarter 2023 Series A preferred unit distribution of $0.77533 per unit, a Series B preferred unit distribution of $0.70515 per unit and a Series C preferred unit distribution of $0.78246 per unit. The preferred unit distributions will be paid on March 15, 2024.
It pays an annual dividend of $1.60, which yields 6.71% on the current market price, compared to a four-year average yield of 11.35%.
During the fiscal fourth quarter that ended December 31, 2023, NS’ service revenues rose 1.8% year-over-year to $304.99 million and product sales grew 12.4% from the prior-year quarter to $146.70 million. As a result, its total revenue increased 5.1% year-over-year to $451.69 million.
Also, the company’s adjusted EBITDA increased 1.1% year-over-year to $179.75 million. Its adjusted net income per common unit improved 8.8% from the year-ago quarter to $0.37.
NS anticipates a positive outlook for the current fiscal year 2024. The company forecasts fiscal year net income between $220 to $260 million and EBITDA ranging from $720 to $780 million. NS plans to maintain financial stability by self-funding operational expenses, growth capital, and distributions, aiming for a year-end debt-to-EBITDA ratio below four times.
Analysts expect NS’ revenue and EPS to rise 13.2% and 248% year-over-year to $428.07 million and $0.31 for the fiscal second quarter ending June 2024.
The stock has gained 49.8% over the past year to close the last trading session at $23.86. It has soared 24.4% over the past three months.
NS’ rosy prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
NS has a B grade for Growth and Momentum. It is ranked #13 in the MLPs - Oil & Gas industry.
To access the additional NS ratings Value, Stability, Sentiment, and Quality, click here.
Graham Corporation (GHM)
GHM designs and manufactures versatile equipment for chemical, petrochemical, defense, space, petroleum refining, cryogenic, and energy industries. Additionally, the company offers rocket propulsion systems, incorporating turbopumps, fuel pumps, and advanced cooling systems.
On November 10, 2023, GHM announced its acquisition of P3 Technologies, LLC, a company known for its expertise in turbomachinery engineering, product development, and production. P3 specializes in serving the space, new energy, and medical markets and is renowned for its innovative rotating machinery.
This acquisition aligns with GHM's expansion plans, adding significant value by enhancing its turbomachinery offerings with P3's complementary technology.
During the fiscal 2024 third quarter that ended December 31, 2023, GHM’s net sales increased 9.9% year-over-year to $43.82 million. The company’s adjusted net income and adjusted net income per share grew 182.8% and 175% from the prior year’s quarter to $2.42 million and $0.22, respectively. Also, its adjusted EBITDA rose 72.1% from the year-ago value to $3.85 million.
The consensus EPS estimate of $0.31 for the fiscal year ending March 2024 indicates a 933.3% year-over-year growth. The consensus revenue estimate of $180.98 million for the same year reflects a 15.2% year-over-year increase. Furthermore, the company topped the consensus revenue estimates in all of the trailing four quarters, which is notable.
The stock has returned 107.7% over the past nine months and 62.9% over the past year, closing the last trading session at $23.59.
GHM’s solid prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
GHM has an A grade for Sentiment and a B for Growth. It has ranked #10 within the 50-stock Energy – Services industry.
Click here to access GHM's additional ratings for Value, Momentum, Stability, and Quality.
What To Do Next?
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WES shares were trading at $34.22 per share on Tuesday morning, up $0.32 (+0.94%). Year-to-date, WES has gained 19.24%, versus a 6.94% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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