Despite several macroeconomic challenges such as persistent inflation, rising interest rates, and recessionary fears, strong oil demand worldwide, with China contributing the most, and tight supply after Saudi Arabia pledged more production cuts could drive oil prices this year.
Before delving deeper into the fundamentals of these stocks, let’s take a look at what’s happening in the oil market.
Oil prices surged lately after Saudi Arabia, the world’s largest crude oil exporter, pledged additional voluntary production cuts in July, while the Organization of Petroleum Exporting Countries and Allies (OPEC+) agreed to extend supply cuts into 2024. In an OPEC+ meeting this Sunday, Saudi said it would cut production by approximately 1 million barrels per day (bpd) to 9 million bpd.
In addition, OPEC+ already had 3.66 million bpd of oil output cuts in place, amounting to 3.6% of global demand, including 2 million bpd agreed to in October last year and voluntary cuts of 1.16 million bpd agreed to in April. These cuts, which were earlier valid until the end of 2023, are extended till end-2024 during Sunday’s meeting.
OPEC+ pumps about 40% of the world’s crude, meaning its policy decisions could have a significant impact on oil prices. Moreover, according to Fatih Birol, the Executive Director of the International Energy Agency (IEA), oil prices are likely to move higher after the OPEC+ decision. He added that China’s economy is the most important factor for the oil market.
“There are many uncertainties, as usual, when it comes to the oil market, and if I have to pick the most important one it’s China,” Birol said in an interview with Bloomberg TV. “Of more than 2 million barrels a day of growth we expect this year in global oil demand, 60% is set to come from China.”
ANZ Group Holdings Limited analysts recently reiterated their calls for $100 per barrel Brent target for the end of 2023, saying, “Investors are likely to add bullish bets, comfortable that Saudi Arabia and OPEC will provide a backstop should the market hit any hurdles.”
Furthermore, Goldman Sachs, which expects Brent at $95 per barrel in December, described OPEC+’s recent meeting as “moderately bullish” to its forecast and offsetting few bearish downside risks, including high supply from sanctioned Russia, Iran, and Venezuela and weaker-than-expected demand from China.
With expectations of oil prices to rise significantly this year amid high demand and tight supply, investing in quality oil stocks BP, REPYY, and UGP, currently trading at a discount, could be wise for potential gains.
BP p.l.c. (BP)
Headquartered in London, United Kingdom, BP engages in the production of natural gas and integrated gas and power; trading of gas; operation of onshore and offshore wind power; and hydrogen and carbon capture and storage facilities. The company operates through Gas & Low Carbon Energy; Oil Production & Operations; and Customers & Products segments.
On May 15, BP Products North America Inc., a wholly-owned indirect subsidiary of BP, completed its $1.3 billion acquisition of TravelCenters of America Inc. (TA), one of the country’s leading full-service travel center operators. The addition of TA might give a turbo-boost to BP’s convenience and mobility business in the U.S.
This acquisition would bring growth opportunities for four of BP’s five transition growth engines, including EV charging via BP pulse, convenience, biofuels/RNG, and hydrogen. It would add EBITDA immediately, expected to grow to about $800 million by 2025, underpinned by investment, integration value, and synergies.
On April 13, BP started oil production at Argos offshore platform while strengthening its leadership position in the deepwater U.S. Gulf of Mexico. With a gross production capacity of up to 140,000 barrels of oil per day, the semi-submersible platform would increase BP’s gross-operated production capacity in the Gulf of Mexico by an estimated 20%. This addition might boost BP’s growth and profitability.
In terms of forward non-GAAP P/E, BP’s 6.05x is 31.9% lower than the industry average of 8.89x. The stock’s forward EV/Sales of 0.66x is 64.8% lower than the 1.88x industry average. Also, its forward Price/Sales multiple of 0.47 is 62.5% lower than the industry average of 1.25.
For the first quarter that ended March 31, 2023, BP’s total revenues and other income increased 11.2% year-over-year to $56.95 billion. Its profit before taxation came in at $11.85 billion, compared to a loss of $17.54 billion in the previous year’s period. Also, profit for the period was $8.42 billion, compared to a loss of $20.07 billion in the prior-year quarter.
Furthermore, the profit for the period attributable to BP shareholders per share was $45.06 versus a loss per share of $104.46 in the same quarter of 2022.
Analysts expect BP’s revenue to increase 3.7% year-over-year to $57.07 billion in the third quarter (ending September 2023). Moreover, the company surpassed the EPS estimates in three of the trailing four quarters, which is impressive. Shares of BP have gained 5.3% over the past six months to close the last trading session at $35.71.
BP’s solid prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
BP has an A grade for Momentum and a B for Value and Quality. It is ranked #8 out of 42 stocks in the B-rated Foreign Oil & Gas industry.
Beyond what I have stated above, we have also given BP grades for Growth, Stability, and Sentiment. Get all BP ratings here.
Repsol, S.A. (REPYY)
REPYY is an integrated global energy company headquartered in Madrid, Spain. The company engages in the exploration, development, sale, and transportation of crude oil and oil products; refining activities and petrochemicals business; and low carbon power generation. It operates through segments: Upstream; Downstream; Industrial; and Commercial and Renewables.
In March, REPYY finalized the incorporation of EIG as a strategic partner in its Exploration and Production (upstream) business. The deal values the upstream business, one of the company’s four business verticals, at $19 billion. The U.S. investor acquired 25% of REPYY’s upstream business, which would continue to sharpen the focus and decarbonize its asset portfolio.
In the same month, REPYY and SEUR, a transport company, signed a strategic agreement to advance electric mobility in Spain. Under the deal, REPYY would install and operate more than 150 recharging points in the 55 work centers that SEUR has nationwide.
This strategic agreement should bode well for the company. Moreover, REPYY currently has one of the most important recharging networks in Spain, with over 1,200 public access recharging points installed, of which more than 530 are operational.
In terms of forward non-GAAP P/E, REPYY is trading at 3.56x, 59.9% lower than the industry average of 8.89x. And the stock’s forward EV/EBITDA multiple of 2.23 is 55.4% lower than the industry average of 5.00. Also, its forward Price/Sales of 0.29x is 76.9% lower than the 1.25x industry average.
For the first quarter that ended March 31, 2023, REPYY’s cash inflows from operating activities were €1.61 billion ($1.72 billion), up 128.1% year-over-year. Also, as of March 2023, the company’s cash and cash equivalents were €5.49 billion ($5.87 billion), while its total assets stood at €60.12 billion ($64.32 billion).
REPYY’s stock has gained 11.3% over the past nine months to close the last trading session at $14.40.
REPYY’s POWR Ratings reflect this strong outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
REPYY has an A grade for Momentum and a B grade for Value. The stock is ranked #5 of 42 stocks in the B-rated Foreign Oil & Gas industry.
In addition to the POWR Ratings grades just highlighted, you can see the REPYY’s rating for Quality, Growth, Sentiment, and Stability here.
Ultrapar Participações S.A. (UGP)
UGP engages in the gas distribution, fuel distribution, and storage businesses internationally. The company operates through the following segments: Ultragaz; Ultracargo; Ipiranga; Oxiteno; Extrafarma; and Others. It is headquartered in São Paulo, Brazil.
On April 19, UGP acquired a 50% stake of Opla, the largest independent terminal of ethanol in Brazil. Located in Paulínia, São Paulo, Opla offers integrated storage and logistics solutions through railways, pipelines, and road transportation. This acquisition marks UGP’s entry into the inland liquid bulk storage and logistics segment, integrated with port terminals, in line with its growth plan.
UGP’s forward EV/Sales of 0.23x is 88% lower than the industry average of 1.88x. Likewise, the stock’s forward Price/Sales multiple of 0.15 is 87.8% lower than the industry average of 1.25.
In the first quarter that ended March 31, 2023, UGP’s adjusted EBITDA from continuing operations increased 20.1% year-over-year to R$ 1.08 billion ($219.64 million). For the Ultragaz segment, gross profit grew 61.9% year-over-year to R$ 512.10 million ($104.15 million), and its operating income was R$ 304.30 million ($61.89 million), up 114.3% year-over-year.
In addition, for the Ultracargo segment, net revenues rose 19.8% year-over-year to R$ 236.50 million ($47.10 million), while operating income came in at R$ 109 million ($22.17 million), an increase of 33.1% year-over-year.
The consensus EPS estimate of $0.26 for the fiscal year (ending December 2023) reflects a 374.7% year-over-year improvement. In addition, UGP’s revenue for the fiscal year 2024 is expected to grow 1.5% year-over-year to $26.31 billion. Moreover, the company’s consensus revenue estimates topped in three of the trailing four quarters.
Over the past six months, the stock has gained 36.8% and 29.8% over the past year to close the last trading day at $3.53.
UGP’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system.
The stock has a B grade for Value and Sentiment. In the same industry, UGP is ranked #4 of 42 stocks.
Click here to access the additional POWR Ratings for UGP (Momentum, Quality, Growth, and Stability).
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BP shares rose $0.06 (+0.17%) in premarket trading Thursday. Year-to-date, BP has gained 4.34%, versus a 11.96% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...
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