2 energy stocks to buy now before they rise even further

By | March 28, 2024

Energy stocks are off to a good start this year. The average energy stock has increased by more than 10%, measured by the Energy Select Sector SPDR ETF. Some have risen even higher.

ExxonMobil (NYSE:XOM) And Energy transfer (NYSE:ET) are notable for their gains starting this year, with both outperforming the Energy Select Sector SPDR ETF. This energy shares could have run even further. This is why investors may want to buy them now before they rise even further.

Catalysts galore

ExxonMobil is up more than 10% this year, largely fueled by a double-digit increase in crude oil prices. Higher oil prices will allow Exxon to generate even more revenue and free cash flow.

However, Exxon doesn’t need higher oil prices to increase its profitability. The company’s current business plan is on track to increase annual revenues by $14 billion through 2027, assuming oil prices average $60 per barrel; it is currently in the $80s. The company invests heavily in high-return capital projects, primarily in the four growth pillars of the Permian Basin, LNGGuyana and Brazil, while delivering significant structural cost savings.

Exxon is working to strengthen its already strong growth plan through acquisitions Natural resources pioneer (NYSE: PXD). The company agreed last fall to acquire the oil and gas producer in a $64.5 billion deal expected to close this year. The acquisition of Pioneer will significantly strengthen Exxon’s operations in the Permian Basin. After acquiring Pioneer, Exxon will more than double its Permian Basin production to 1.3 million barrels of oil equivalent per day (BOE/d). The company expects the deal will allow it to grow its production in the region to 2 million BOE/d by 2027. That growing high-margin production will lead to higher revenues and free cash flow for the oil giant.

In addition, Exxon is exploring whether it could potentially capitalize on rivals Chevron‘S proposed acquisition of Hesone of his partners Guyana. Exxon believes the transaction gave rise to a clause in the joint operating agreement that could give the company the right to acquire Hess’ assets in the oil-rich region. Although Exxon does not want to buy Hess, it is said to be interested in purchasing its stake in Guyana. A deal for these assets would be a real coup, further strengthening the long-term earnings growth profile.

His strategy is to pay dividends

Energy Transfer has also achieved an increase of more than 10% this year. On the one hand, higher oil prices do not have much impact on the economy master limited partnership (MLP) cash flow, as more than 90% of revenues are fee-based and therefore insulated from commodity price volatility. However, higher oil prices can stimulate volume growth and provide new expansion opportunities.

Apart from oil prices, strategy execution appears to be the main catalyst driving Energy Transfer’s rally. The company has focused on strengthening its financial profile in recent years. That’s starting to pay off. Are leverage ratio tends toward the lower end of the target range of 4.0 to 4.5. This recently resulted in a credit upgrade for the company, which helps reduce financing costs. The MLP has also improved its capital structure by buying back several series of its outstanding bonds preferred units.

The company is also benefiting from its consolidation strategy. Last year it made two notable acquisitions, including acquiring fellow MLP Crestwood Equity Partners in a $7.1 billion deal. These deals will contribute to 7% profit growth for Energy Transfer this year. The Crestwood acquisition exceeds expectations. It now expects to achieve $80 million in cost savings by 2026, including $65 million this year, which is double the initial estimate.

Energy Transfer’s improving financial profile and growing profits are helping to boost its valuation, which remains near the bottom of its peers even after the rally. This low valuation is the reason why the MLP offers such a high return of over 8%. The company plans to take advantage of this decoupling by buying back its dirt-cheap units with some of its growing excess free cash flow. These buybacks could further fuel the rally.

The fuel continues to rise

ExxonMobil and Energy Transfer have already achieved a 10% increase this year. However, the energy companies have plenty of catalysts to rise further. Investors may want to buy now before they go even higher.

Should You Invest $1,000 in ExxonMobil Now?

Consider the following before buying shares in ExxonMobil:

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Matt DiLallo has positions in Chevron and Energy Transfer. The Motley Fool holds positions in and recommends Chevron. The Motley Fool recommends Pioneer Natural Resources. The Motley Fool has a disclosure policy.

2 Energy Stocks to Buy Now Before They Soar Even Higher was originally published by The Motley Fool

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