The energy sector’s outlook appears robust, thanks to the rising oil and gas demand and limited crude supplies. An in-depth analysis suggests that fundamentally strong energy stocks Marathon Petroleum Corporation (MPC) and Shell plc (SHEL) emerge as solid buy candidates now. However, it could also be wise to watch stock Suncor Energy Inc. (SU) for potential buying opportunities.
Let's first focus on discussing the recent developments within the oil and gas sector before delving into the fundamentals of these stocks.
With only two months remaining in the year, Wall Street analysts and investors are trying to predict shifts in the oil markets. According to OPEC's 2023 World Oil Outlook, global oil demand could potentially hit 116 million barrels per day (bpd) by 2045 – an increase of roughly 6 million bpd from last year’s prediction.
This surge could surpass expectations, with primary growth drivers being India, China, other Asian nations, Africa, and the Middle East. Global oil demand might reach 110.2 million bpd by 2028.
Amid escalating oil demand, high oil prices could arise due to supply restrictions induced by OPEC+ and Russia’s prolonged production cuts. While the Israel-Hamas conflict has not directly impacted oil distribution, it introduces significant geopolitical risks to the oil market.
Potential sanctions against Iran in response to their suspected involvement in Hamas' strikes on Israel could aggravate pressure in an already precarious oil market, subsequently driving a further oil price increase.
Oil prices have been volatile over the past couple of months. According to Standard Chartered, its 2024 Brent forecast of $98/bbl is firmly grounded on supply-demand dynamics. Brent prices are estimated to average at $109 per barrel in 2025 and escalate to $128 per barrel in 2026.
In light of these encouraging trends, let's look at the fundamentals of the three Energy - Oil & Gas stocks, beginning with number 3.
Stock #3: Suncor Energy Inc. (SU)
Headquartered in Calgary, Canada, SU operates as an integrated energy company in Canada and internationally. It operates through Oil Sands; Exploration and Production; and Refining and Marketing segments.
On October 4, SU agreed to purchase TotalEnergies EP Canada Ltd., which holds a 31.23% working interest in the Fort Hills oil sands mining project, for $1.468 billion. The acquisition adds 61,000 bpd of net bitumen production capacity and 675 million barrels of proved and probable reserves to SU’s existing oil sands portfolio. This should bode well for the company.
The company has maximized returns to its shareholders. SU returned $1.4 billion of value to shareholders in the second quarter of 2023 through $684 million in share repurchases and the payment of $679 million of dividends.
In September, the company paid its shareholders C$0.52 per share quarterly dividends. It has a record of paying dividends for 29 consecutive years.
Its annual dividend of $1.54 per share translates to a dividend yield of 4.72% on the current share price. Its four-year average dividend yield is 4.55%. The company’s dividend payouts have grown at a CAGR of 16.3% over the past three years and 7.3% over the past five years.
SU’s trailing-12-month gross profit and levered FCF margins of 60.14% and 17.39% are 26.5% and 183.7% higher than the industry average of 47.53% and 6.13%, respectively. Its trailing-12-month cash from operations of $9.22 billion is significantly higher than the industry average of $653.45 million.
SU’s total revenues and other income came in at C$11.72 billion ($8.45 billion) for the fiscal second quarter that ended June 30, 2023. Its net earnings and net earnings per common share came at C$1.88 billion ($1.35 billion) and C$1.43, respectively.
Moreover, its cash flow provided by operating activities stood at C$2.80 billion ($2.02 billion). As of June 30, 2023, its total current liabilities came at C$12 billion ($8.65 billion), compared to C$12.87 billion ($9.27 billion) as of December 31, 2022.
SU’s revenue and EPS for the fiscal third quarter ending September 2023 are expected to be $9.32 billion and $0.97, respectively. Moreover, it surpassed the consensus revenue in all of the trailing four quarters and EPS estimates in three of the four trailing quarters, which is promising.
Over the past three months, the stock has gained 5.5% to close the last trading session at $32.72. It gained 6.1% over the past six months. The stock is trading above its 100-day and 200-day moving averages of $31.98 and $31.72, respectively, indicating an uptrend.
SU’s fundamentals are reflected in its POWR Ratings. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
The stock has an A grade for Momentum and Quality. SU ranks #20 of 86 stocks in the Energy – Oil & Gas industry.
To see additional POWR Ratings for Growth, Value, Stability, and Sentiment for SU, click here.
Stock #2: Marathon Petroleum Corporation (MPC)
MPC is involved in midstream and downstream businesses, such as petroleum product refining, marketing, and retail in the United States. The company operates through two segments: Refining & Marketing and Midstream transport.
The company returned $3.1 billion of capital through $2.8 billion in share repurchases and $297 million of dividends.
On October 25, MPC’s board of directors declared a quarterly dividend of $0.825 per share on the common stock, payable to the shareholders on December 11. MPC’s annual dividend of $3.30 per share translates to a 2.13% yield on the current price level.
Its dividends have grown at 9.7% and 11% CAGRs over the past three and five years, respectively. Its four-year average dividend yield is 3.88%. The company has paid dividends for 11 consecutive years.
MPC’s trailing-12-month ROCE, ROTC, and ROTA of 44.10%, 15.41%, and 13.36% are 110.2%, 48.2%, and 68.1% higher than the industry averages of 20.98%, 10.39%, and 7.95%, respectively.
For the fiscal third quarter that ended September 30, 2023, MPC’s total revenues and other income stood at $41.58 billion, while its adjusted EBITDA came at $5.71 billion. Adjusted net income attributable to MPC stood at $3.22 billion, while its adjusted income per share increased 4.2% year-over-year to $8.14.
Analysts expect MPC’s revenue and EPS for the fiscal year ending December 2023 to come in at $148.94 billion and $23.04, respectively. MPC topped the consensus EPS estimates in each of the trailing four quarters and revenue estimates in three of the trailing four quarters.
The stock has gained 30.2% over the past year and 2.6% intraday to close the last trading session at $155.21. Moreover, the stock is currently trading above its 50-day and 200-day moving averages of $149.51 and $129.98, respectively.
It is no surprise that MPC has an overall B rating, equating to Buy in our POWR Ratings system.
MPC has an A grade for Quality and a B for Momentum. MPC ranks #9 within the same industry.
Beyond what we have mentioned above, to see the additional POWR Ratings for Growth, Value, Stability, and Sentiment for MPC, click here.
Stock #1: Shell plc (SHEL)
Headquartered in London, the U.K., SHEL operates as an energy and petrochemical company in Europe, Asia, Oceania, Africa, the U.S., and the rest of the Americas. The company operates through Integrated Gas; Upstream; Marketing; Chemicals and Products; and Renewables and Energy Solutions segments.
SHEL is commencing a $3.5 billion buyback program for the upcoming quarter, bringing the buybacks for the second half of 2023 to $6.5 billion, more than the $5 billion announced in June. This takes the total announced shareholder distributions for 2023 to ~$23 billion.
The company’s annual dividend of $2.31 per share translates to a yield of 3.54% at the current price level. Its four-year average yield is 2.73%.
SHEL’s trailing-12-month levered FCF of 8.72% is 42.3% higher than the industry average of 6.13%. Its trailing-12-month of $64.23 billion is significantly higher than the industry average of $653.45 million.
For the fiscal third quarter that ended September 30, 2023, SHEL’s total revenue and other income stood at $78.01 billion. Income attributable to SHEL shareholders increased 4.5% year-over-year to $7.04 billion, while adjusted earnings per share per ADS stood at $1.84.
As of September 30, 2023, total current liabilities stood at $94.35 billion, compared to $119.92 billion as of December 31, 2022.
Analysts expect SHEL’s revenue and EPS for the fiscal year (ending December 2024) to increase 2.1% and 1.5% year-over-year to $354.42 billion and $8.68, respectively. Also, the company surpassed the consensus revenue estimates in three of the trailing four quarters.
Shares of SHEL have gained 6.5% over the six months and 17.1% over the past year to close the last trading session at $65.39. Moreover, the stock is currently trading above its 50-day and 200-day moving averages of $64.67 and $61.15, respectively.
SHEL’s robust prospects are reflected in its POWR Ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system.
SHEL has an A grade for Momentum and a B for Stability and Quality. It is ranked #7 within the same industry.
Click here for the additional POWR Ratings for SHEL (Growth, Value, and Sentiment).
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.
SHEL shares rose $1.26 (+1.93%) in premarket trading Thursday. Year-to-date, SHEL has gained 18.25%, versus a 11.75% 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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