The energy sector’s outlook looks robust, thanks to growing demand for oil and gas and constrained crude supplies amid steps taken by Saudi Arabia, Russia, and their oil-producing allies. Given the industry tailwinds, quality energy stocks Equinor ASA (EQNR), Inpex Corporation (IPXHY), and YPF Sociedad Anónima (YPF) could be solid additions to your portfolio now.
Before delving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the energy industry’s prospects.
According to the latest IEA Oil Market Report (OMR), global oil demand is climbing to record highs, driven by solid summer air travel, increased oil use in power generation, and soaring Chinese petrochemical activity. World oil demand is expected to grow by 2.2 mb/d year-over-year to 102.2 mb/d in 2023, with China accounting for more than 70% of the increase.
On the other side, supply is shrinking, as heavyweight oil producer Saudi Arabia announced an extension of a 1 mb/d voluntary crude production cut into September, in the third month of such declines.
“In effect, the Kingdom’s production for the month of September 2023 will be approximately 9 million barrels per day,” the state-owned Saudi Press Agency said, citing a source from the Saudi Ministry of Energy.
The 1 mb/d output cut by Saudi adds to 1.66 mb/d of other voluntary production cuts that some members of the Organization of the Petroleum Exporting Countries have put in place until the end of next year.
Further, the Kingdom is widely anticipated to extend its voluntary 1 mb/d cut for a fourth straight month into October. Meanwhile, Russian Deputy Prime Minister Alexander Novak said that Moscow agreed with OPEC+ partners for continued export cuts next month.
Thus, the oil market's fundamental picture looks relatively bullish, as demand remains resilient despite prevailing concerns of slowing economies while supply is tightening, thanks to output cuts from OPEC+ and Saudi Arabia. As a result, oil prices are surging, which leads to higher gasoline and overall energy prices.
Several economists and analysts have raised their 2023 oil price forecasts. The commodity experts predicted Brent Crude to average $82.45 a barrel in 2023, compared to the July consensus of $81.95. The WTI crude is expected to average $77.83 per barrel for the year, above the prior forecast of $77.20.
Moreover, as per Standard Chartered, effective producer output restraint, led by Saudi Arabia, will create favorable conditions for a price rally that will push Brent prices above the peak of $89.09/bbl achieved earlier this year, with their average fourth-quarter forecast at $93/bbl and an intra-quarter high exceeding $100/bbl.
In the same line, Goldman Sachs upgraded the 2023 oil demand estimate by about 550,000 bpd. It expects the solid demand to lead to a wider-than-expected deficit of as much as 1.8 million bpd in the second half of 2023 and 600,000 bpd next year. The bank maintained its $86 a-barrel Brent forecast for December 2023 and expects prices to rise to $93 per barrel in the second quarter of 2024.
With these favorable trends in mind, let’s delve into the fundamentals of the three best Foreign Oil & Gas stock picks, beginning with the third choice.
Stock #3: Equinor ASA (EQNR)
Headquartered in Stavanger, Norway, EQNR engages in the exploration, production, transportation, refining, and marketing of petroleum and other forms of energy internationally. It operates through Exploration & Production Norway; Exploration & Production International; Exploration & Production USA; Marketing, Midstream & Processing; Renewables; and Other segments.
On July 25, EQNR signed an agreement with Denham Capital to acquire 100% of Rio Energy, one of the leading companies in the development of onshore renewable energy in Brazil. The portfolio consists of 0.2 GW of wind power, 0.6 GW of solar power, and 1.2 GW of projects to be developed.
“Through Rio Energy, Equinor will assume a leadership position in Brazil's rapidly growing renewable energy industry. It accelerates production and cash flow, provides us with a solid platform for growth, and adds capabilities and an attractive pipeline of projects, said Pål Eitrheim, Executive Vice President of Renewables at EQNR.
Also, in May, EQNR and its partners made a financial investment decision (FID) to develop the BM-C-33 gas and condensate project in the Campos Basin, Brazil, with an investment of about $9 billion. The BM-C-33 project involves the development of three different pre-salt discoveries, namely Pão de Açúcar, Gávea, and Seat.
The discoveries contain natural gas and oil/condensate recoverable reserves of more than one billion barrels of oil equivalent. Moreover, EQNR holds an operating stake of 35% in the BM-C-33 gas and condensate project. This project is expected to benefit the company significantly.
EQNR’s Board of Directors decided to have an ordinary quarterly dividend of $0.30 per share and to continue an extraordinary dividend of $0.60 per share for the second quarter of 2023, in line with communication at the Capital Markets Update in February. Expected total capital distributions for this year are around $17 billion, including a share buyback program of $6 billion.
EQNR pays a $1.20 per share dividend annually, translating to a 3.80% yield on the prevailing share price. Its four-year average dividend yield is 5.25%. The company’s dividend payouts have increased at an 8.3% CAGR over the past five years.
EQNR’s forward non-GAAP P/E of 8.21x is 23.9% lower than the industry average of 10.79x. In addition, the stock’s forward EV/Sales and EV/EBITDA multiples of 0.76 and 1.73 are favorably lower than the industry averages of 2.23 and 5.93, respectively.
During the second quarter that ended June 30, 2023, EQNR reported total revenues and other income of $22.87 billion. Its net operating income and net income came in at $7.05 billion and $1.83 billion, respectively. Also, cash flow provided by operating activities before taxes paid and working capital items amounted to $10.50 billion for the quarter.
Furthermore, EQNR’s cash and cash equivalents stood at $19.65 billion as of June 30, 2023, compared to $15.58 billion as of December 31, 2022. The company’s current liabilities reduced to $32.89 billion, compared to $43.54 billion as of December 31, 2022.
Analysts expect EQNR’s EPS for the next fiscal year (ending December 2024) to increase 7.7% from the previous year to $4.15. The stock gained 5.6% over the past month and 6.6% over the past six months to close its last trading session at $31.60.
EQNR’s solid fundamentals are reflected in its POWR Ratings. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has an A grade for Momentum and Quality. EQNR is ranked #19 of 43 stocks in the B-rated Foreign Oil & Gas industry.
Click here to access the other ratings for EQNR’s Growth, Value, Stability, and Sentiment.
Stock #2: YPF Sociedad Anónima (YPF)
Based in Buenos Aires, Argentina, YPF engages in oil and gas upstream and downstream activities. The company’s upstream operations include exploration, exploitation, and production of crude oil, natural gas, and NGLs. Its downstream operations comprise the refining, marketing, and distribution of petroleum products and petroleum derivatives.
During the second quarter of fiscal 2023, YPF continued with the execution of the new fuel specifications project, such as the construction of a new diesel hydrotreatment unit at the Luján de Cuyo refinery and a gasoline hydrotreatment and revamping of existing gasoline units in La Plata industrial complex.
Additionally, the revamping of the Topping D Unit of the La Plata refinery is at the final stage of construction and is expected to be ready by the end of 2023. This will allow to process greater shale oil.
Along the same line, in the Luján de Cuyo Industrial Complex, the engineering and purchase of equipment for the revamping of Topping III continues. In Plaza Huincul Refinery, the company keeps progressing on the revamping of the Topping Unit. These developments reflect YPF’s continued growth and expansion.
YPF’s forward non-GAAP P/E of 3.63x is 66.4% lower than the industry average of 10.79x. The stock’s forward EV/Sales and Price/Sales multiples of 1.08 and 0.76 are 51.5% and 50.8% lower than the industry averages of 2.23 and 1.55, respectively.
YPF’s revenues increased 3.2% quarter-on-quarter to $4.38 billion, primarily due to higher natural gas sales for the second quarter of 2023. Its earnings before tax grew 6.8% sequentially to $455 million. The company’s net income rose 11.4% quarter-over-quarter to $380 million.
Furthermore, the company’s cash and cash equivalents were $1.47 billion, an increase of 18.4% year-over-year.
Street expects YPF’s revenue for the first quarter (ending March 2024) to increase 5.1% year-over-year to $4.46 billion. Moreover, the company has surpassed the consensus revenue estimates in each of the trailing four quarters.
Shares of YPF have gained 63.2% year-to-date and 152.9% over the past year to close the last trading session at $14.21.
YPF’s POWR Ratings reflect this robust outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
YPF has a grade of A for Momentum. It has a B grade for Value and Quality. Within the B-rated Foreign Oil & Gas industry, it is ranked #18 out of 43 stocks.
Beyond what we stated above, we also have YPF’s ratings for Growth, Stability, Quality, and Sentiment. Get all YPF ratings here.
Stock #2: Inpex Corporation (IPXHY)
IPXHY researches, explores, develops, produces, and sells oil, natural gas, and other mineral resources in Japan, the rest of Asia and Oceania, Europe and NIS countries, the Middle East, and the Americas. Also, it is involved in the investment and lending to the companies engaged in the mineral resources business. The company is headquartered in Tokyo, Japan.
On August 9, IPXHY’s Board of Directors increased the interim dividend to ¥37 ($0.25) per common share, with a record of June 30, 2023, an increase of ¥5 ($0.034) from the most recent forecast of ¥32 ($0.22) per common stock. The company also revised the year-end dividend per share forecast for the year ending December 31, 2023, to ¥37 ($0.25), up ¥5 ($0.034) from the previous forecast.
As a result, the annual dividend for the fiscal year 2023 is expected to amount to ¥74 ($0.51) per common stock. IPXHY strives to strengthen its shareholder returns by including share buybacks based on the company’s business environment, financial base, management conditions, etc.
In terms of forward EV/EBIT, IPXHY is trading at 3.88x, 60% lower than the 9.71x industry average. Likewise, its forward Price/Sales multiple of 1.31 is 15.5% lower than the industry average of 1.55.
For the six months ended June 30, 2023, IPXHY’s income before income taxes increased 11.2% year-over-year to ¥696.49 billion ($4.76 billion). Its net income attributable to owners of parent was ¥254.26 billion ($1.74 billion), up 38.1% year-over-year. Also, net cash provided by operating activities was ¥432.37 billion ($2.95 billion), an increase of 5.2% over the prior year’s period.
In addition, as of June 30, 2023, the company’s current assets were ¥907.20 billion ($6.20 billion), compared to ¥729.41 billion ($4.98 billion) as of December 31, 2022.
Analysts expect IPXHY’s revenue to increase 684.9% year-over-year to $14.37 billion for the fiscal year ending December 2023. The company’s revenue for the first quarter (ending March 2024) is expected to grow 3.5% year-over-year to $4.46 billion.
IPXHY’s stock has gained 33.6% over the past six months and 38.9% year-to-date to close the last trading session at $14.44.
IPXHY’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
IPXHY has a B grade for Stability. It is ranked #16 among 43 stocks in the same industry.
To see additional POWR Ratings for Sentiment, Quality, Growth, Value, and Momentum for IPXHY, click here.
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EQNR shares fell $0.24 (-0.76%) in premarket trading Tuesday. Year-to-date, EQNR has declined -4.82%, versus a 18.87% 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.
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