In the ever-volatile energy sector, finding undervalued stocks that are poised for a rebound could be rewarding for investors. As oil prices edge higher and global demand dynamics shift, certain energy stocks show strong potential for a comeback soon.
In this article, I have highlighted three energy stocks, namely, Energy Transfer LP (ET), VAALCO Energy, Inc. (EGY), and Obsidian Energy Ltd. (OBE), which are trading under $20. These companies possess solid fundamentals and are well-positioned for growth.
Oil prices have been on an upward trend recently, driven by a decrease in crude stocks as U.S. refineries ramp up processing and gasoline inventories ease, signaling stronger demand. Brent futures rose to $85.43 a barrel, and U.S. West Texas Intermediate (WTI) crude increased to $82.47 a barrel.
Additionally, U.S. consumer prices unexpectedly fell, reinforcing the disinflation trend and bringing the Federal Reserve closer to potential interest rate cuts. Lower interest rates could boost oil demand by making credit cheaper for consumers.
Despite global demand growth slowing to its lowest in over a year, the International Energy Agency (IEA) and OPEC remain optimistic about future oil demand. The IEA projects global demand growth of 970,000 barrels per day (bpd) in 2024, while OPEC maintains its forecasts for demand growth at 2.25 million bpd this year and 1.85 million bpd next year.
Furthermore, OPEC's latest report states, “Expected strong mobility and air travel in the Northern Hemisphere during the summer driving/holiday season is anticipated to bolster demand for transportation fuels and drive growth in the United States.”
With that in mind, let’s look at the fundamentals of these affordable stocks in detail, beginning with number 3.
Stock #3: Obsidian Energy Ltd. (OBE)
Based in Calgary, Canada, OBE is engaged in exploring, producing, and developing oil and natural gas properties in the Western Canada Sedimentary Basin.
On June 26, 2024, the company completed its acquisition of 1,700 boe/d of Clearwater production and 148 net sections of land in the Peace River area. This, along with other smaller acquisitions in 2024, brings the company’s holdings to over 680 net sections of land with Clearwater and Bluesky heavy oil rights.
Stephen Loukas, President and CEO, stated that this expansion has identified around 200 potential drilling locations, enhancing the company’s growth options for 2024-2026 and beyond.
In terms of forward non-GAAP P/E, OBE is trading at 4.79x, which is 56.7% lower than the industry average of 11.06x. Also, its forward EV/EBITDA multiple of 2.37 is 58.6% lower than the industry average of 5.73.
OBE’s trailing-12-month EBITDA margin of 58.73% is 71.8% higher than the industry average of 34.18%. Similarly, its trailing-12-month gross profit and levered FCF margins of 62.32% and 7.66% are 38.5% and 24.3% higher than their respective industry averages of 45.01% and 6.16%.
OBE’s production revenue for the first quarter that ended March 31, 2024, amounted to CAD177.30 million ($130.10 million). Its net and comprehensive income came in at CAD 11.90 million ($8.73 million), with a net income per share of CAD0.15. As of March 31, 2024, its total assets increased to CAD2.32 billion ($1.70 billion) from CAD2.25 billion ($$1.65 billion) as of December 31, 2023.
Analysts expect OBE’s EPS to increase 63.8% year-over-year to $1.56 for the fiscal year ending December 2024. The company’s revenue for the same period is expected to grow by 13.3% from the previous year to $605.56 million. For the fiscal year 2025, the company’s EPS and revenue are expected to rise 55.2% and 31.3% year-over-year, respectively.
Over the past six months, the stock has gained 11.7%, closing the last trading session at $7.45.
OBE’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
It also has a B grade for Value. In the 80-stock Energy - Oil & Gas industry, OBE is ranked #12. Click here to access the additional OBE ratings (Growth, Momentum, Stability, Sentiment, and Quality)
Stock #2: Energy Transfer LP (ET)
ET provides energy-related services worldwide. It owns and operates a natural gas transportation pipeline and natural gas storage facilities in Texas and Oklahoma, as well as a nearly 20,090-mile interstate natural gas pipeline. It also sells natural gas to electric utilities, independent power plants, local distribution and other marketing companies, and industrial end-users.
On May 28, the company announced the acquisition of WTG Midstream Holdings LLC (WTG) for approximately $3.25 billion. WTG owns and operates the largest private gas gathering and processing business in the Permian Basin, with significant assets in the core of the Midland Basin.
This acquisition, expected to close in the third quarter of 2024, aims to expand ET’s natural gas pipeline and processing network in the Permian Basin and strengthen its downstream operations.
On May 20, ET paid its shareholders a quarterly dividend of $0.3175 per common unit for the first quarter of fiscal 2024, reflecting an increase of 3.3% year-over-year.
ET pays an annual distribution of $1.27 per unit, which translates to a yield of 7.80% on the prevailing share price. Its four-year average dividend yield is 9.34%. Moreover, the company’s dividend payouts have grown at a CAGR of 18.1% over the past three years.
In terms of forward non-GAAP PEG, ET is trading at 0.75x, which is 60.9% lower than the industry average of 1.92x. Likewise, the stock’s forward EV/Sales multiple of 1.38 is 33.8% lower than the industry average of 2.09. Also, the stock’s 0.62x forward Price/Sales ratio compares to the industry average of 1.43x.
ET’s trailing-12-month asset turnover ratio of 0.74x is 48.7% higher than the industry average of 0.50x.
During the first quarter that ended March 31, 2024, ET’s revenues increased 13.9% year-over-year to $21.63 billion. Its operating income rose 15.4% year-over-year to $2.38 billion. The company’s net income was $1.69 billion, up 16.9% from the previous year’s quarter. Its adjusted EBITDA grew 13% from the year-ago value to $3.88 billion.
In addition, the company’s distributable cash flow came in at $2.87 billion, an increase of 15.8% year-over-year. As of March 31, 2024, its current assets were $15.02 billion, compared to $12.43 billion as of December 31, 2023.
Street expects ET’s revenue and EPS for the second quarter (ended June 2024) to increase 16.9% and 39.2% year-over-year to $21.43 billion and $0.35, respectively. Further, the company’s revenue and EPS are expected to register an 11.9% and 33% year-over-year growth in the fiscal year 2024.
The stock has gained 26.8% over the past year to close the last trading session at $16.28.
ET’s bright prospects are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Momentum and a B for Growth, Value, and Stability. Within the same industry, it is ranked #7. Click here to access ET’s rating for Sentiment and Quality.
Stock #1: VAALCO Energy, Inc. (EGY)
EGY acquires, explores, develops, and produces crude oil, natural gas, and natural gas liquids in Gabon, Egypt, Equatorial Guinea, and Canada.
On April 30, EGY completed the all-cash acquisition of Svenska Petroleum Exploration AB for $40.2 million, enhancing its production capacity in the Baobab field. It now produces over 5,000 barrels of oil equivalent per day (99% oil).
This acquisition strategically expands EGY’s presence in West Africa, particularly in Cote d’Ivoire, an investment-friendly country with significant upside potential. Further, the move bolsters EGY’s growth prospects and regional operational footprint.
In terms of forward P/E, EGY is trading at 7.48x, which is 35.7% lower than the industry average of 11.65x. Likewise, the stock’s forward EV/Sales multiple of 1.42 is 31.9% lower than the industry average of 2.09. Also, the stock’s 2.41x forward EV/EBITDA ratio compares to the industry average of 5.73x.
The stock's trailing-12-month EBITDA margin of 60.36% is 76.6% higher than the industry average of 34.18%. Likewise, its trailing-12-month gross profit and EBIT margins of 65.35% and 35.78% are 45.2% and 82.5% higher than their respective industry averages of 45.01% and 19.61%.
For the first quarter (ended March 31, 2024), EGY’s revenue increased 24.6% year-over-year to $100.16 million. Its operating income grew 48.9% from the year-ago value to $32.19 million. The company’s net income amounted to $7.69 million and $0.07 per share, reflecting a year-over-year improvement of 121.5% and 133.3%, respectively. In addition, its adjusted EBITDAX stood at $61.74 million, up 29.1% year-over-year.
The consensus revenue estimate of $125.74 million for the fiscal second quarter (ended June 2024) represents a 15.1% increase year-over-year. The consensus EPS estimate of $0.13 for the to-be-reported quarter indicates an 18.2% improvement year-over-year. The company has an impressive surprise history; it surpassed the consensus revenue estimates in three of the trailing four quarters.
Shares of EGY have gained 64.4% over the past year and 43.9% year-to-date to close the last trading session at $6.46.
It’s no surprise that EGY has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Sentiment and a B for Growth, Value, and Quality. Out of 80 stocks in the same industry, it is ranked #6.
In addition to the POWR Ratings we’ve stated above, we have also rated EGY for Momentum and Stability. Get all EGY ratings here.
What To Do Next?
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ET shares were trading at $16.24 per share on Thursday afternoon, down $0.04 (-0.25%). Year-to-date, ET has gained 22.73%, versus a 17.80% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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