Energy stocks have gotten off to a hot start this year. The average energy stock is up more than 10% as measured by the Energy Select Sector SPDR ETF. Some have surged even higher.
ExxonMobil (NYSE: XOM) and Energy Transfer (NYSE: ET) stand out for their surges to start this year, with both outperforming the Energy Select Sector SPDR ETF. These energy stocks could have further to run. Here’s why investors might want to buy them now before they rally even more.
Catalysts galore
ExxonMobil has rallied more than 10% this year, fueled largely by a double-digit surge in crude oil prices. Higher oil prices will enable Exxon to generate even more earnings and free cash flow.
However, Exxon doesn’t need higher oil prices to boost its profitability. The company’s current corporate plan has it on track to increase its annual earnings by $14 billion through 2027, assuming oil averages $60 a barrel; it’s currently in the $80s. The company is investing heavily in high-return capital projects, primarily in its four growth pillars of the Permian Basin, LNG, Guyana, and Brazil, while delivering meaningful structural cost savings.
Exxon is working to enhance its already strong growth plan by acquiring Pioneer Natural Resources (NYSE: PXD). The company agreed to buy the oil and gas producer in a $64.5 billion deal last fall, which it expects to close this year. Acquiring Pioneer will significantly enhance Exxon’s operations in the Permian Basin. Upon closing the acquisition of Pioneer, Exxon will more than double its production rate in the Permian Basin to 1.3 million barrels of oil equivalent per day (BOE/d). The company expects the deal will enable it to grow its output in the region to 2 million BOE/d by 2027. That growing high-margin production will drive increased earnings and free cash flow for the oil giant.
On top of that, Exxon is looking into potentially capitalizing on rival Chevron‘s proposed acquisition of Hess, one of its partners in Guyana. Exxon believes the transaction triggered a clause in the joint operating agreement that could give it the right to acquire Hess’ assets in the oil-rich region. While Exxon doesn’t want to buy Hess, it would be interested in buying its stake in Guyana. A deal for those assets would be a real coup, further enhancing its long-term earnings growth profile.
Its strategy is paying dividends
Energy Transfer has also rallied more than 10% this year. On one hand, higher oil prices don’t have as much of an impact on the master limited partnership’s (MLP) cash flow since more than 90% of its earnings are fee-based and, therefore, insulated from commodity price volatility. However, higher oil prices can drive volume growth and provide new expansion opportunities.
Oil prices aside, the primary catalyst driving Energy Transfer’s rally seems to be the execution of its strategy. The company has focused on strengthening its financial profile in recent years. That’s starting to pay dividends. Its leverage ratio is trending toward the low end of its 4.0 to 4.5 target range. That recently won it a credit rating upgrade, which helps reduce borrowing costs. The MLP has also enhanced its capital structure by repurchasing several series of its outstanding 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. Those deals will help drive 7% earnings growth for Energy Transfer this year. The Crestwood acquisition is outperforming its expectations. It now expects to capture $80 million of cost savings by 2026, including $65 million this year, double its initial estimate.
Energy Transfer’s improving financial profile and growing earnings are helping lift its valuation, which still trades near the bottom of its peer group even after its rally. That low valuation is why the MLP offers such a high yield of over 8%. The company plans to capitalize on this disconnect by repurchasing its dirt cheap units with some of its growing excess free cash flow. Those repurchases could give its rally even more fuel.
The fuel to continue rising
ExxonMobil and Energy Transfer have already rallied 10% this year. However, the energy companies have plenty of catalysts to continue rising. Investors might want to buy now before they head even higher.
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Matt DiLallo has positions in Chevron and Energy Transfer. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Pioneer Natural Resources. The Motley Fool has a disclosure policy.
2 Energy Stocks You Can Buy Right Now Before They Surge Even Higher was originally published by The Motley Fool
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