The energy sector should continue to face solid demand this year. In this article, we take a closer look at three fundamentally sound energy stocks, namely Shell plc (SHEL), ARC Resources Ltd. (AETUF), and Scorpio Tankers Inc. (STNG), to help you determine whether they are worth adding to your portfolio.
Despite the inherently cyclical nature, the energy sector had an impressive run thanks to soaring oil and gas prices, exacerbated by Russia’s invasion of Ukraine. The sector’s robust performance is evident from the S&P 500 Energy Sector Index's 38.5% gains year-to-date.
This month, major oil-producing countries like Saudi Arabia announced production cuts to boost prices, following the Organization of the Petroleum Exporting Countries (OPEC) extended output cuts through 2024. The country will cut 1 million bpd (barrels per day) from its July output to stabilize oil markets.
Citing the supply cuts, the U.S. Energy Information Administration (EIA) boosted its forecast for U.S. oil prices by 11.4% and 14.5% for next year's second and third quarters. Oil prices are expected to average $80 a barrel in the fourth quarter of 2024, reflecting a 19.4% increase from the EIA’s prior forecast.
According to the International Energy Agency’s (IEA) latest monthly oil market report, global oil demand is expected to rise by 2.4 million barrels per day (mb/d) year-over-year in 2023 to a record 102.3 mb/d. China’s economic recovery shows no signs of slowing down, with its oil demand reaching a record high of 16 mb/d in April.
Given this backdrop, we believe fundamentally sound dividend-paying energy stocks SHEL, AETUF, and STNG are well-positioned to help you fetch stable and promising returns. Let’s look at the featured stocks in detail.
Shell plc (SHEL)
SHEL is an international energy and petrochemical company headquartered in London, United Kingdom. The company is engaged in the exploration, production, refining, and marketing of oil and natural gas and the manufacturing and marketing of chemicals. Its businesses include Upstream, Integrated Gas, Renewables and Energy Solutions, and Downstream.
On April 18, the company announced that its subsidiary, Shell U.K. Ltd, had restarted operations at the Pierce field in the U.K. North Sea, following a significant redevelopment to enable gas production after years of the field producing only oil. Pierce is a joint arrangement between SHEL (92.52%) and Ithaca Energy (U.K.) Limited (7.48%).
On March 31, Shell USA, Inc., a subsidiary of SHEL, completed the previously announced acquisition of Volta Inc. in an all-cash transaction valued at nearly $169 million. With this acquisition, SHEL now owns and operates one of the largest public Electric Vehicle (EV) charging networks in the United States.
Volta provides SHEL with an existing public charging network of over 3,000 charge points across 31 U.S. states and territories, a development pipeline of over 3,400 additional charge points, and capabilities to develop, operate and monetize E.V. charging infrastructure.
On February 20, SHEL’s subsidiary Shell Petroleum NV completed the acquisition of 100% of the shares of Nature Energy Biogas A/S, the largest RNG producer in Europe. This acquisition is expected to increase the company’s customer base across multiple sectors and accelerate its transition to net-zero emissions.
SHEL’s trailing-12-month ROTC of 14.88% is 32.7% higher than the 11.21% industry average. Likewise, its trailing-12-month levered FCF margin of 6.73% is 13.9% higher than the industry average of 5.91%.
During the fiscal first quarter, which ended March 31, 2023, SHEL’s total revenue and other income increased 7% year-over-year to $89.02 billion. Its adjusted earnings grew 5.6% from the year-ago value to $9.65 billion. The company’s adjusted EBITDA increased 12.6% year-over-year to $21.43 billion. Also, its adjusted EPS increased 15.8% year-over-year to $1.39.
For the year ending December 31, 2024, SHEL’s EPS estimate of $8.30 indicates a marginal year-over-year growth. Its revenue for the next year is expected to increase 2.2% year-over-year to $348.40 billion. The company surpassed the consensus EPS and revenue estimates in each of the trailing four quarters.
SHEL’s EBIT and net income have increased at a CAGR of 58.1% and 64.7% over the past three years, while its EPS improved at a 70.5% CAGR.
Over the past nine months, the stock has gained 23.9% to close the last trading session at $59.60.
SHEL’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Momentum and a B for Stability and Quality. Among the 92 stocks in the Energy – Oil & Gas industry, it is ranked #12. Click here to see the other ratings of SHEL for Growth, Value, and Sentiment.
ARC Resources Ltd. (AETUF)
Based in Calgary, Canada, AETUF is a pure-play Montney producer engaged in developing, developing, and producing crude oil and natural gas liquids. Its Montney projects include operations in northeast British Columbia and northern Alberta.
On June 15, backed by its strong financials, the company declared a quarterly dividend of $0.17 per share, reflecting a 13% increase from $0.15 per share. This dividend is payable to its shareholders on July 17, 2023. AETUF’s four-year average dividend yield is 4.97%, while its annual dividend of $0.50 per share translates to a 3.67% yield on the current prices.
AETUF’s trailing-12-month levered FCF and net income margins of 15.86% and 35.33% are 168.5% and 131.2% higher than the industry averages of 5.91% and 15.28%, respectively. Also, its ROTA of 25.59% compares to the industry average of 8.81%.
For the first quarter that ended March 31, 2023, AETUF’s total revenue, interest, and other income, and gain on risk management contracts increased 52.4% year-over-year to C$1.79 billion ($1.36 billion).
The company’s net income amounted to C$574.90 million ($436.08 million) or C$0.93 per share compared to a net loss of C$69.40 million ($52.64 million) or C$0.10 per share in the prior-year quarter. Also, its net debt decreased 25.4% year-over-year to C$1.26 billion ($959.33 million).
Street expects AETUF’s EPS and revenue for the fiscal year 2024 to amount to $2.04 and $4.18 billion, indicating increases of 6.3% and 0.3% year-over-year, respectively. Moreover, the company surpassed the EPS estimates in each of the trailing four quarters.
Its revenue and EBITDA have improved at impressive CAGRs of 92.9% and 105.6%, respectively, over the past three years. Likewise, its total assets have increased at a 30.6% CAGR over the same period.
The stock has gained 23.8% over the past three months to close the last trading session at $13.67.
AETUF’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
It also has a B grade for Sentiment and Quality. It is ranked #13 of 92 stocks within the same industry. To see additional POWR Ratings of AETUF for Growth, Value, Momentum, and Stability, click here.
Scorpio Tankers Inc. (STNG)
STNG is a Monaco-based provider in the seaborne transportation of refined petroleum products. It operates through four segments: Handymax; M.R. (Medium Range); Long Range 1 (LR1)/Panamax; and Long Range 2 (LR2)/Aframax. As of March 23, 2023, it consists of 113 wholly owned, finance leased, or bareboat chartered-in tankers.
On June 22, STNG signed a new five-year credit facility of up to $94 million with DekaBank Deutsche Girozentrale, bearing interest at SOFR plus a 1.70% per annum margin. The credit facility will finance one M.R. and three LR2 product tankers.
In the same month, the company repurchased 851,978 of its common shares in the open market at an average price of $46.74 per share. Also, on May 31, STNG’s Board of Directors replenished the 2023 Securities Repurchase Program up to an aggregate of $250 million of the company’s securities.
On May 1, the company also increased its quarterly dividend by 25% from the last quarter to $0.25 per common share, with a payment date of June 30, 2023, to its shareholders. This reflects the company’s strong cash flows and ability to boost shareholder returns.
STNG’s four-year average dividend yield is 1.96%, and its current dividend of $1 translates to a 2.27% yield on current prices. Its dividends have grown at a 17.6% CAGR over the past three years and a 10.2% CAGR over the past five years.
In terms of trailing-12-month levered FCF margin, STNG’s 57.50% is 873.3% higher than the industry average of 5.91%. Also, its trailing-12-month net income and EBIT margins of 51.60% and 59.88% are 237.7% and 134.4% higher than the industry averages of 15.28% and 25.54%, respectively.
STNG’s revenue increased 120.9% year-over-year to $384.43 million in the fiscal year (ended March 31, 2023), while its adjusted EBITDA improved by 260.6% from the year-ago value to $286.39 million. Its operating income came in at $231.24 million, compared to an operating loss of $46.83 million in the same period last year.
The company’s adjusted net income amounted to $195.55 million and $3.31 per share versus an adjusted net loss of $14.86 million and $0.27 per share, respectively, in the prior-year quarter.
Analysts expect STNG’s EPS for the current year (ending December 2023) to increase marginally year-over-year to $11.45, while its revenue is expected to be $1.41 billion in the same period. Additionally, it surpassed the EPS estimates in each of the trailing four quarters, which is excellent.
The stock’s revenue and EBITDA have grown at CAGRs of 32.5% and 54.6% over the past three years, respectively. Likewise, its levered FCF has improved at a 73.2% CAGR in the same period.
STNG’s shares have gained 30.2% over the past year to close the last trading session at $44.06.
It’s no surprise that STNG has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Quality and a B for Momentum. Out of 92 stocks in the same industry, it is ranked #11.
In addition to the POWR Ratings we’ve stated above, we also have STNG’s ratings for Growth, Value, Stability, and Sentiment. Get all STNG ratings here.
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SHEL shares were trading at $60.42 per share on Monday afternoon, up $0.82 (+1.38%). Year-to-date, SHEL has gained 8.10%, versus a 13.89% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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