Coupled with the OPEC+ surprise production cuts, the rising demand on the backs of China’s reopening could propel the oil and gas prices further up in the near future. Against this backdrop, let us explore some energy stocks, such as Hess Midstream LP (HESM) and CVR Energy, Inc. (CVI), which are outperforming Wall Street now.
In 2022, endless and painful macroeconomic factors like geopolitical turmoil, persistent rate hikes, and high prices considerably diminished the outlook for certain sectors but, on the contrary, significantly brightened the prospects of some other sectors like the energy sector.
Despite fears of an economic slump, it is envisioned that the sector is well-positioned to remain on a positive growth trajectory. To begin with, global energy demand is projected by OPEC to increase by 23% in the period to 2045.
World oil demand in the first quarter of 2023 is estimated to have grown by 2.1 mb/d year-over-year on the backs of a strong rebound in China’s oil demand and solid oil demand data in other non-OECD regions. Also, OPEC projects Chinese oil demand to grow by 760,000 barrels per day (bpd) this year.
In addition, the International Energy Association anticipates global oil demand to increase by two million barrels per day to a record 101.9 million bpd this year. According to the energy agency, a much stronger increase of 2.7 million bpd is expected through to the end of the year, propelled by a continued recovery in China and international travel.
The U.S. crude oil exports for April have surpassed forecasts, hitting a record 4.5 million barrels per day in March. April exports to China surged to approx. 850,000 barrels per day, the highest level since May 2020.
Hence, fundamentally strong energy stocks HESM and CVI, which have outperformed the S&P 500’s decline of 2.3% over the past two years, might be solid buys to capitalize on industrial headwinds.
Hess Midstream LP (HESM)
HESM owns, develops, operates, and acquires midstream assets. The company operates through three segments: Gathering; Processing and Storage; and Terminaling and Export.
On March 28, HESM announced the execution of a definitive agreement providing for the approximately $100 million repurchase of Class B units by its subsidiary, HESM, from affiliates of Hess Corporation and Global Infrastructure Partners, Hess Midstream’s sponsors.
Jonathan Stein, Chief Financial Officer of HESM, said, “The unit repurchase transaction is expected to provide immediate accretion to our shareholders. Following this unit repurchase, we expect to continue to have more than $1 billion of financial flexibility through 2025 that can be used to support our return of capital framework, including potential additional and ongoing unit repurchases.”
On April 24, HESM declared a quarterly distribution of $0.5851 per Class A share for the quarter that ended March 31, 2023. The distribution represents an approximate 2.7% increase in the quarterly distribution per Class A share for the first quarter of 2023 compared to the fourth quarter of 2022.
HESM’s forward annual dividend rate of $2.34 per share translates to an 8.09% yield on the current market price. Its dividend payments have grown at a CAGR of 10.9% and 18.7% over the past three and five years, respectively. The company has a four-year average dividend yield of 8.03%.
HESM’s forward EV/EBITDA of 4.35x is 10.8% lower than the industry average of 4.88x. Its forward Price/Sales multiple of 0.96 is 18.1% lower than the industry average of 1.17.
During the fiscal first quarter that ended March 31, 2023, HESM’s total revenues stood at $305 million, while its adjusted EBITDA stood at $239 million. Its net income attributable to HESM increased 22.5% year-over-year to $20.70 million, while net income attributable to HESM per Class A share stood at $0.47 for the same quarter.
HESM’s EPS is expected to rise 3.6% year-over-year to $2.08 for the fiscal year ending December 2023. The company’s revenue for the same year is expected to be $1.33 billion, up 4.4% year-over-year.
Shares of HESM have gained 27.9% over the past two years and 1.8% intraday to close its last trading session at $28.94.
HESM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
The stock has a B grade for Momentum and Quality. Within the A-rated MLPs – Gas industry, it is ranked first out of the two stocks.
Click here to get all ratings for HESM for Growth, Value, Stability, and Sentiment.
CVR Energy, Inc. (CVI)
CVI operates as a diversified holding company that primarily engages in petroleum refining and nitrogen fertilizer manufacturing. The company operates through its two broad segments of Petroleum and Nitrogen Fertilizer.
CVI announced a first-quarter 2023 dividend of 50 cents per share. The dividend is payable to the shareholders on May 22, 2023. The company’s annual dividend payout per share translates to a forward yield of 8.35% at the current price. Its four-year dividend yield is 11.60%.
CVI’s forward EV/EBITDA of 3.74x is 23.3% lower than the industry average of 4.88x. Its forward Price/Sales multiple of 0.25 is 78.3% lower than the industry average of 1.17.
CVI’s net sales came in at $2.29 billion in the fiscal first quarter that ended March 31, 2023. Its operating income increased 50% year-over-year to $330 million. The company’s adjusted EBITDA improved 115.5% from the prior-year quarter to $334 million.
Net income attributable to CVI stockholders came in at $195 million, indicating an increase of 107.4% year-over-year, while its adjusted earnings per share stood at $1.44, up significantly from the prior-year quarter.
Street EPS estimate for the fiscal second quarter ending June 2023 of $1.13. Likewise, Street estimates revenue to come in at $2.40 billion for the same quarter. Moreover, it surpassed consensus revenue estimates in all the trailing four quarters.
The stock has gained 2.3% over the past two years to close the last trading session at $23.94. Moreover, it gained 3% intraday.
CVI’s POWR Ratings reflect its positive outlook. CVI has an overall B rating, equating to Buy in our POWR Ratings system.
CVI has an A grade for Quality and B for Value and Momentum. It is ranked #8 out of the 92 stocks in the Energy – Oil & Gas industry.
To see the additional POWR Ratings for Growth, Stability, and Sentiment for CVI, click here.
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HESM shares were trading at $28.74 per share on Monday morning, down $0.20 (-0.69%). Year-to-date, HESM has declined -0.16%, versus a 8.22% 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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