The outbreak of the coronavirus in China has got a grip on the market, too. This is only to be expected; with almost $60 million people under lockdown as well as an international effort in place to develop a vaccine and arrest the virus’ spread, the effect was going to be felt by several sectors.
Travel companies, aviation and retailers are among the industries heavily affected, so far. Feeling the force of the outbreak most pertinently, though, is the energy sector. Since the outbreak was announced on January 17, crude oil prices have dropped by 14%, while the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has tumbled by 16%.
RBC’s Michael Tran is not surprised. “Fundamentally driven pricing models break during periods of epidemics. Buyers typically scatter during such events and sell first, ask questions later,” said the analyst.
As per usual, though, the market presents opportunities for those willing to seek them out. RBC recently reassessed a number of the energy stocks under its coverage and we decided to follow suit. Using TipRanks’ Stock Comparison tool, we lined up 3 of the tickers alongside each other to get the lowdown. Let’s take a look at the results.
Energy Transfer LP (ET)
Midstream giant Energy Transfer is one of the largest master limited partnerships (MLP) in the energy sector. The company owns and operates roughly 9,400 miles of natural gas transportation pipelines and provides various energy-related services in the US and China.
2019 was a tale of two sides for ET. On the plus side, the company is expecting to post adjusted EBITDA of between $11 billion and $11.1 billion for the year, up by roughly 16% from 2018 and beating its estimate of between $10.6 billion to $10.8 billion. On the other hand, its focus on expansion includes the recent $5 billion acquisition of fellow energy player SemGroup. While the deal enhances its growth prospects and boosts the company’s earnings and cash flow, investors saw it as weighing heavily on the balance sheet. This along with headwinds on account of construction issues with its Mariner Express 2X pipeline exerted downward pressure on the share price in 2019.
Still, the company’s share price is currently trading at less than eight times earnings. This coupled with a massive dividend yield of 9.69% are reasons enough for RBC Capital’s Elvira Scotto to be bullish on Energy Transfer’s prospects in 2020.
The analyst noted, “We believe ET is well-positioned to generate meaningful cash flow growth as large-scale growth projects come online over the next few years. Moreover, with its expansive asset footprint, we expect ET to continue to identify highly accretive growth opportunities over the coming years while maintaining a strong balance sheet and significant excess distribution coverage, which should allow ET to return more cash to unit holders over time via unit repurchase and distribution increases.”
Scotto, therefore, reiterated an Outperform rating on ET along with a price target of $20. The target indicates that the 5-star analyst believes the midstream player can add 56% to its share price in the coming months. (To watch Scotto’s track record, click here)
The rest of the Street backs up the RBC analyst. 6 Buys merge into a unanimous Strong Buy consensus rating. Should the average price target of $18 be met over the next 12 months, expect shares to gain 41%. (See Energy Transfer stock analysis on TipRanks)
Marathon Petroleum Corporation (MPC)
Next up is the largest petroleum refiner in the US, Marathon Petroleum. The company’s West Coast, Gulf Coast and Midwest refineries have capacity for more than 3 million barrels per day.
MPC’s recent quarterly report was a strong one and beat the estimates by wide margins. Adjusted EPS of $1.56 came in 84% above the Street consensus. Although revenue of $31.4 billion represented a year-over-year loss of 3.4%, it beat the consensus estimate by 6%. In contrast to other key players, refining was the star of the show; the company reported $420 million of synergies captured in 4Q19. In total, the $1.1 billion in synergies for 2019 easily eclipsed management’s guidance for $600 million of annual gross run-rate synergies.
RBC’s Brad Heffern believes there are several catalysts which can propel Marathon forward in 2020. Among those are the spinoff of its Speedway gas station business, increased repurchase activity and an increase of the company’s US drilling activity.
Heffern concluded, “We like Marathon Petroleum for its diversified refining footprint across the Midwest, Rocky Mountains, Gulf Coast and West Coast, which gives the company access to both inland and waterborne crude supplies. Relatively wide inland crude spreads, especially on Canadian crudes, are likely to be a tailwind for the company. In our opinion, Marathon’s retail business, Speedway, is the most attractive retail franchise in our coverage universe, and the extension of the Speedway model to the acquired ANDV stores could provide meaningful upside.”
All of the above convinced the analyst to reiterate an Outperform rating on the petroleum giant. The average price target of $67 is kept, too, and conveys Heffern’s belief that Marathon can climb 29% higher in 2020. (To watch Heffern’s track record, click here)
It appears the Street is singing from the same hymn sheet as the RBC analyst. Marathon’s Strong Buy consensus rating consists of 6 Buys and 1 Hold. The average price target of $72.57 indicates upside potential of 39%. (See Marathon stock analysis on TipRanks)
Phillips 66 Partners (PSXP)
The final energy stock on our list is Phillips 66 Partners. The Houston, Texas-based company is a fellow MLP and midstream player. Unlike the overall energy sector which only exhibited modest gains of 6% in 2019, PSXP’s share price added 45% of muscle.
However, the refining sector has endured a rough time recently due to the worrisome trend of lower demand. This in turn affected PSXP’s 4Q19 earnings report, with the refining segment down by almost 60% from the previous quarter. The company also saw an 8% sequential drop in its midstream earnings, while chemicals income fell by 34%. Nevertheless, despite the headwinds, the company was able to generate $1.7 billion in cash, a 2% increase from the prior quarter. It was enough to fund expansion, pay out its dividend to investors ($3.50 annually) and repurchase shares.
Scotto, who also covers Phillips, believes PSXP “continues to solidly execute on its plan and is well positioned for cash flow growth as projects come online.”
She said, “We believe PSXP is well positioned to generate highly visible cash flow growth over the next several years, underpinned by a robust backlog of organic growth projects. PSXP’s primarily fee-based revenues and minimum volume commitments help mitigate commodity price exposure and limit downside volumetric risk, respectively. We believe PSXP’s growth profile coupled with limited downside risk warrants a premium valuation.”
The 5-star analyst, therefore, reiterated an Outperform call on Phillips 66 and kept her price target at $65. The figure implies upside potential of 10%.
PSXP’s Moderate Buy consensus rating breaks down into 3 Buys and 2 Holds. The average price target comes in a touch lower than Scotto’s, at $64, and represents possible 12-month gains in the shape of 8%. (See PSXP stock-price forecast on TipRanks)