Oil prices could experience a significant increase this year due to geopolitical conflicts, demand resilience, and changing production dynamics. Thus, investors could consider fortifying their portfolio by investing in Ultrapar Participações S.A. (UGP), Sunoco LP (SUN), and REX American Resources Corporation (REX) for solid gains in 2024.

Let's understand this in more detail.

The ongoing conflict in the Red Sea, marked by persistent attacks from Yemen-based Houthi militants despite a U.S.-led task force deployment, disrupted oil trading. Cole Smead, President of Smead Capital Management, notes that despite market volatility deterring investors, the enduring demand for oil remains a constant force.

Phillip Streible, Chief Market Strategist at Blue Line Futures, has affirmed that oil serves as a valuable asset and hedge against geopolitical risks and inflation. He anticipates a natural price floor and subsequent ascent in oil prices due to ongoing geopolitical disruptions.

Moreover, surpassing initial predictions, U.S. crude oil production has outpaced expectations, counteracting OPEC+ supply reduction efforts to elevate prices. Anticipated to persist this year, this surge is fueled by enhanced efficiency, increased spending, and production initiatives from recently merged U.S. supermajors.

Rapid production growth is also driving a surge in U.S. crude oil and petroleum product exports. Projections from the December Short-Term Energy Outlook (STEO) by the Energy Information Administration (EIA) indicate an anticipated average of 12.93 million bpd in 2023, with a further increase to 13.11 million bpd expected this year.

Furthermore, the EIA predicts a rise in the Brent crude oil spot price, projecting an increase from an average of $78 per barrel in December to $84 per barrel in the first half of 2024. This uptick is attributed, in part, to the recently announced production cuts by OPEC+.

That said, Bank of America (BAC) foresees Brent prices averaging $90 per barrel in 2024, while West Texas Intermediate (WTI), the U.S. benchmark, is expected to average $86 per barrel next year. Goldman Sachs (GS) offers a slightly higher projection, predicting Brent prices to average $94 per barrel in the same period.

Considering this outlook, let’s look at the fundamentals of the three energy stocks.

Ultrapar Participações S.A. (UGP)

Headquartered in São Paulo, Brazil, UGP offers compressed natural gas, renewable power, and liquefied petroleum gas to residential, commercial, and industrial customers. In addition, it markets and distributes lubricants, natural gas for automobiles, ethanol, diesel, fuel oil, kerosene, and gasoline.

In terms of trailing-12-month PEG, UGP is trading at 0.12x, 29.4% lower than the industry average of 0.17x. Its trailing-12-month EV/Sales of 0.30x is 85.1% lower than the 2.00x industry average. Moreover, the stock’s trailing-12-month Price/Sales of 0.23x compares with the industry average of 1.32x.

For the third quarter that ended September 2023, UGP’s adjusted EBITDA rose 138.8% from the year-ago value to R$ 2 billion ($412.19 million). Also, the company’s net income and cash inflow from operations grew 973.5% and 47% from the prior year’s period to R$ 891 million ($183.54 million) and R$ 1.90 billion ($391.59 million), respectively.

Analysts expect UGP’s revenue to increase 4.2% year-over-year to $26.84 billion for the fiscal year ending December 2024. The company’s EPS for the same year is estimated to grow 24.5% from the prior year to $0.27. Shares of UGP have gained 41.2% over the past six months to close the last trading session at $5.42.

UGP’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

UGP has an A grade for Sentiment and a B for Value. It is ranked #3 out of 43 stocks within the B-rated Foreign Oil & Gas industry.

In addition to the POWR Ratings I’ve highlighted, you can see UGP’s Growth, Stability, Quality, and Momentum ratings here.

Sunoco LP (SUN)

SUN specializes in motor fuel distribution and retailing. In its Fuel Distribution and Marketing segment, it sources fuel from independent refiners, supplying independently operated dealer stations and distributors. The All Other segment includes revenue streams like partnership credit card services, franchise royalties, and retail operations.

In terms of forward non-GAAP PEG, the stock is trading at 1.29x, 30.5% lower than the industry average of 1.85x. Its forward EV/Sales of 0.40x is 80.1% lower than the 2.04x industry average. Furthermore, SUN’s forward Price/Sales of 0.22x compares with the industry average of 1.45x.

For the third quarter that ended September 30, 2023, SUN’s operating income increased 125.3% year-over-year to $338 million. Its net income and comprehensive income grew 227.7% from the year-ago value to $272 million. In addition, net income per common unit rose 293.3% from the prior year’s period to $2.95.

As of September 30, 2023, SUN’s current assets amounted to $2.48 billion, compared to $1.98 billion as of December 31, 2022.

Analysts expect SUN’s EPS to increase 37.6% year-over-year to $6.44 for the fiscal year ending December 2023. The stock has gained 10.1% over the past month and 37.3% over the past six months, closing the last trading session at $59.93.

SUN’s robust outlook is apparent in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system.

SUN has an A grade for Growth. It is ranked 12 out of 26 stocks within the A-rated MLPs - Oil & Gas industry.

Click here to access additional SUN ratings for Value, Momentum, Stability, Sentiment and Quality.

REX American Resources Corporation (REX)

REX is a producer and distributor of ethanol, with a comprehensive product line that includes corn, distillers, grains, non-food grade corn oil, gasoline, and natural gas. Furthermore, it supplies solubles to dry distillers' grains, which are utilized as a source of protein in animal feed.

In terms of forward EV/Sales, REX is trading at 0.86x, 57.6% lower than the industry average of 2.04x. In addition, the stock’s forward Price/Sales of 1.23x is 15.3% lower than the 1.45x industry average.

During the third quarter that ended October 31, 2023, REX’s net sales and revenue marginally increased year-over-year to $221.08 million. Its gross profit grew 323.7% from the year-ago value to $39.29 million.

Also, net income and net income per share attributable to REX common shareholders rose 719% and 727.8% from the prior year’s period to $26.08 million and $1.49, respectively.

The consensus EPS estimate of $2.85 for the fiscal year ending January 2024 reflects an 81.5% year-over-year increase. Similarly, the consensus EPS estimate of $4.12 for the next fiscal year ending January 2025 exhibits a 44.6% rise from the previous year. Also, the company surpassed the consensus EPS estimates in three of four trailing quarters.

The stock has gained 37.4% over the past six months, closing the last trading session at $47.30.

REX’s sound prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.

REX has an A grade for Sentiment and a B for Growth. It is ranked #7 out of 49 stocks within the Energy - Services industry.

Click here to access the additional REX ratings (Value, Momentum, Stability, and Quality).

What To Do Next?

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UGP shares were trading at $5.40 per share on Tuesday afternoon, down $0.02 (-0.37%). Year-to-date, UGP has declined -0.37%, versus a -0.47% rise in the benchmark S&P 500 index during the same period.

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

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