Last year, energy stocks did better than the S&P 500, which fell 19%. On average, the energy sector gained 59%. That’s a strong performance, the kind that always makes investors happy. Traders and analysts are both paying close attention to the energy sector in this first quarter of 2023 because of this.
So far, the energy sector is not getting involved. Inflation seems to be going down, and the Federal Reserve has said that it might raise interest rates more slowly in the future. Both of these things have helped growth stocks more than cyclical stocks like energy.
In the future, however, the price of oil is likely to go up by the end of 1H23. China is reopening its economy, which will boost demand, and Russia’s exports, which dropped when Russia invaded Ukraine last year, have almost reached the levels they were at before the war. During the spring and summer in the northern hemisphere, there will be more demand in the US, which will also help prices. This will likely be reflected in share prices.
In light of this, Wall Street analysts are looking into the energy sector for stocks that are likely to go up by at least 40%. With gains that big, it’s worth taking a second look, so we’ve looked up the details on two names that fit the bill.
TXO Energy Partners (TXO)
The first energy stock we’ll look at has only been on the market since this year, when it had its initial public offering (IPO). As a limited master partnership, TXO Energy Partners does business in the Permian basin in Texas and New Mexico and the San Juan basin in New Mexico and Colorado. The company’s main goal is to make money by using conventional oil and gas sites in its core business areas.
TXO Energy Partners has a wide range of conventional assets that are made up of different ways to make hydrocarbons. These include the production of coalbed methane, which is mostly done in the San Juan Basin, and the production of methane from water and CO2 floods, which is mostly done in the Permian Basin. As of July 1, 2022, the company had proved reserves of 143.05 million barrels of oil equivalent, of which 38% were oil and 82% were developed.
On January 27, the stock was put on the market. During the IPO, 5 million common units were sold, and when it ended on February 6, the company said that the underwriters had taken advantage of their option to buy an extra 750,000 common shares. The IPO brought in a total of $115 million in gross proceeds. The stock is now worth $23.74, which is 8% more than what it was worth at the end of the first day.
John Freeman, a 5-star analyst for Raymond James who is covering this newly public stock, thinks that the fact that it doesn’t do fracking could be a net asset.
“TXO’s base decline rate really sets it apart from its peers, “So said Freeman. “Because of its traditional asset base, TXO has a base decline rate of about 9% per year, which is the highest among its peers. This means that, compared to peers, only a small amount of capital is needed to maintain and grow production levels. Unlike traditional E&P MLPs, which needed outside financing to pay for capital expenditures (capex), this means that the company has a higher free cash flow profile than its unconventional peers.
The analyst also likes the management team a lot, pointing out: “Before running TXO, all of TXO’s managers were in top positions at XTO Energy. In fact, between the IPO and the sale of XOM, XTO had an annualized return of about 26%, which was about 8 times better than the S&P during that time. From a technical point of view, TXO’s management team has worked in more than 15 U.S. shale basins for many years.”
Freeman calls TXO shares a Strong Buy, which is in line with this bullish view. His price target of $36 means that it could go up by 43% in the next year.
The company Diamond Offshore Drilling (DO)
The second energy stock we’ll look at is a company that drills for oil and gas. This one is focused on the hard area of drilling for hydrocarbons in the ocean. Diamond Offshore runs a fleet of deepwater rigs, which includes both semisubmersibles and drillships that can change where they are in the water. Brazil’s Petrobras just gave the company’s ultra-deepwater rig Ocean Courage a $429 million, four-year contract project.
Diamond Offshore did poorly during the corona pandemic, and in April 2020, they filed for bankruptcy under Chapter 11. The company finished reorganizing its finances to get out of Chapter 11 bankruptcy in April 2021, and the DO ticker went back on the stock market in March 2022.
Tomorrow, we’ll get Diamond’s 4Q22 and full-year results, but we can look back at its 3Q22 report to get a sense of how the company is doing. Diamond’s top line for the third quarter was $226 million, which was the second consecutive quarter in which it grew. This was a 10% increase from the second quarter, and it was more than the average prediction of $181.39 million.
Diamond went from losing $21.9 million, or 22 cents per share, in the second quarter to making $5.5 million, or 5 cents per diluted share, in the third quarter. Analysts were expecting a loss of 31 cents per share, so this was a huge win.
It was a good turn around for the company, which was helped by how well the company’s operating rigs did. Overall, Diamond’s fleet of deepwater drilling rigs brought in 97.3% more money than they cost, and the Ocean BlackHawk rig got a bonus for finishing its first well in Senegal. Also, the drillship Vela started a big job in the Gulf of Mexico, and this year, it may be able to do up to seven more wells.
Analyst David Anderson of the UK’s largest bank, Barclays, is now following Diamond. He thinks the company is in a good position to make money in the future.
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Anderson wrote-
“Following a transition year in 2022 after its April 2021 emergence from bankruptcy, we expect DO to generate significant EBITDA growth from 2023-2025 following a roughly breakeven 2022. This year will be just the first step, moving higher in 2024 and 2025 driven primarily by five rigs rolling off contract in 2024… which presents a nice repricing opportunity”
Anderson gives the stock a “Overweight” rating, which means “Buy.” His price target for the stock is $21, which means it has a strong 79% upside potential over the next year. Diamond is one of those stocks that people don’t know much about. The only recent analyst review of this company is Anderson’s, and it’s a good one. (See the stock forecast for Diamond)
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