Energy's middlemen aren't getting the attention or valuations they deserve, according to Citi analyst Timm Schneider, who thinks that the stocks have the potential to rise 45%, on average.
The companies that transport oil from wells to refiners , store it for later use, or process it to be shipped overseas, have lagged behind the broader market along with the better-known oil giants and producers this summer. Oil prices have fluctuated for the past few months, rising above $70 in June but failing to get much higher .
Some of the middlemen sign long-term contracts that ought to insulate them from some of the gyrations, but they tend to trade along with oil prices regardless, given that the cost of crude affects their future profitability. Stronger markets mean their services will be in higher demand.
The companies released second-quarter results that were generally in line with expectations, and estimates for their adjusted earnings have drifted higher in recent months. Yet the stocks have been sluggish at best.
Schneider thinks that the old method of calculating valuations for the group— expecting them to revert to 2019 levels—looks outdated. The Citi team devised a new method meant to take into account the cost of both debt and equity, but also looking more at overall market risk.
The old method implied 35% upside on average for the stocks, while the new method points to 55%, Schneider wrote. He took the midpoint of those approaches, leaving Citi with an estimate of 45% upside.
Citi is advising investors interested in the space to try a barbell approach. That means investing in some bargain-bin stocks that appear to have more upside but are riskier, while also buying blue-chip stocks that may not rise as much but also seem less likely to fall.
The bargain-bin stocks with the most potential to rise include Energy Transfer (ET), Plains All American (PAA), and Genesis Energy (GEL), according to Schneider. The most attractive blue-chip stocks include Cheniere Energy (LNG), Enterprise Products Partners (EPD), and Magellan Midstream Partners (MMP).
Cheniere has performed best among the blue chips over the past month. Cheniere owns hubs for processing and transporting liquefied natural gas and is likely to benefit as the price of gas has been rising fast. The company is also in position to benefit if demand for natural gas increases in overseas markets, as it has been.
Schneider's target price is $115, while Cheniere stock was down 0.2% on Wednesday to $89.62.
Write to Avi Salzman at email@example.com
6 Energy Stocks That Don't Deserve to Be Left Behind
Credit: Avi Salzman