Will the Energy Sector Rebound in 2025?

Will the Energy Sector Rebound in 2025?

The energy sector has weathered multiple challenges in 2024, including oil price volatility driven by supply management issues and macroeconomic weakness, contributing to its underperformance in 2024.

However, the sector made gains last week, as the U.S. reported its fifth consecutive weekly draw in crude reserves. Longer-term forecasts suggest the sector’s potential to rebound further in 2025, with crude oil prices projected to remain elevated, ranging from $70 to $90 per barrel. Optimism about the sector is driven by several factors, including higher forecasts for Chinese GDP growth in 2025 and AI’s growing power demands. Ongoing conflict in Ukraine and the Middle East also has the potential to contribute to a supportive environment for oil prices.

The energy sector’s growth prospects for the coming year make it a potentially attractive opportunity for dividend-focused investors. With global demand rising and oil-export countries maintaining production discipline, energy companies can generate substantial cash flows that can offer above-average dividend yields, in addition to capital appreciation.

Energy Sector Slumps As 2024 Wraps Up, But There Is a Bright Side

Since November 21, energy stocks have weakened alongside a similar deterioration in Uranium industry shares and China’s 10-year government bond yield. This suggests that traders are dialing back expectations for AI-driven energy demand while growing more pessimistic about China’s economic prospects in 2025.

Yet, crude oil prices have held steady. During this period, the Federal Reserve trimmed rate cut projections for next year as the 10-year Treasury yield rallied, speaking to US economic resilience. This may be keeping oil prices afloat and offers a bright spot for the energy sector in 2025.

Top 2 Energy Stocks With Solid Dividends

SA Quant has identified two top Quant-rated energy stocks with attractive dividend yields that might benefit in 2025. These stocks display favorable factor grades, as well as above-average dividend yields, and dividend safety grades that are in line or better than the broader energy sector.

Additionally, the stocks selected meet the following criteria:

• 1. Market capitalization > 500M
• 2. Stock price >$2.00
• 3. US domiciled companies

1. Vitesse Energy, Inc. (VTS)

• Industry: Oil and Gas Exploration and Production
• Quant Sector Ranking (as of 12/30/2024): 37 out of 235
• Quant Industry Ranking (as of 12/30/2024): 9 out of 71
• FWD Yield: 8.56%
• Market Capitalization: $724.70M
• Quant Rating: Buy

VTS is an independent energy company based in Greenwood Village, Colorado, specializing in the acquisition and development of non-operated oil and natural gas sites in the US. The company owns a working interest in over 5,000 wells in the Williston Basin located in Montana and North Dakota, as well as additional operations in Colorado and Wyoming. VTS is different from other upstream companies in that it functions as a “non-operator,” focused on acquiring and managing interests in oil and gas properties rather than directly operating them.

VTS differs from its competitors by leveraging data, technology, and experience to execute a return-driven approach to oil and gas investing through its proprietary system, Luminis. VTS uses its Luminis system to collect and analyze data across land, engineering, finance, and accounting to identify undervalued oil and gas assets and turn them into profitable investments.

Source Link: VTS Q3 2024 Investor Presentation

VTS’ approach has contributed to its strong growth grade, having delivered 41% EBITDA growth Y/Y and an operating cash flow of 3.21%. The company also displays an exceptional EBITDA margin of 74% vs. the sector’s 34%. This ability to convert revenue into cash flow has contributed to the company’s attractive dividend profile; VTS currently offers a FWD yield of 8.56%, which is 91% above the sector median.

VTS Dividend Yield Grade

VTS also displays a dividend safety grade in line with the broader sector, underpinned by its strong interest coverage ratio of 7.9x. VTS offers investors a combination of strong growth, above-average profitability, and an excellent dividend yield within the energy sector.

2. Permian Resources Corporation (PR)

• Industry: Oil and Gas Exploration and Production
• Quant Sector Ranking (as of 12/30/2024): 27 out of 235
• Quant Industry Ranking (as of 12/30/2024): 6 out of 71
• FWD Yield: 7.15%
• Market Capitalization: $11.13B
• Quant Rating: Buy

With operations concentrated in the Delaware Basin, a sub-division of the Permian Basin, PR is focused on acquiring and developing high-return oil and natural gas properties. The company holds approximately 450,000 net leasehold acres in the Permian Basin, which is considered to have the lowest break-even pricing of any oil and gas-producing basin in North America.

Source Link

In Q3, the company increased its well count from 250 to 270 while maintaining the same rig count, demonstrating exceptional operational improvements and cost reductions. Permian also achieved 161,000 barrels of oil daily and increased Gulf Coast gas sales by 50%. These developments have contributed to solid growth and profitability grades for PR. The company boasts a FWD EBITDA growth of 37%, which is a 950% increase over the sector median. Regarding profitability, PR maintains an exceptional TTM EBITDA margin of 79% versus the sector’s 34%.

PR Growth Grade

PR is trading at an attractive valuation, with a TTM P/B of 1.1x and a FWD P/E of 9.7X, a 22% and 23% reduction to the sector median, respectively. The company also offers an exceptional forward dividend yield of 7.15%, which is more than 50% above the energy sector median.

PR Dividend Grades

Strong dividend safety and growth grades complement PR, offering reassurance that the current yield level is not only sustainable but also has further room to run. Permian’s strong growth, steady gains in operational efficiency, and excellent dividend profile make this a potential buy for those on the hunt in the energy sector.

Concluding Summary

The energy sector has weathered multiple challenges in 2024, marked by oil price volatility driven by supply management issues and macroeconomic weakness. However, recent draws on U.S. crude reserves, projected economic growth in China, rising AI power demands, and ongoing geopolitical tensions could help support a rebound for energy stocks in the coming year. High-yield energy stocks can provide investors with a solid income stream alongside potential capital appreciation in the event the energy sector rebounds in 2025.

SA Quant has identified two top Quant-ranked energy stocks that combine strong fundamentals with attractive dividend yields, and dividend safety profiles. Vitesse Energy and Permian Resources Corporation stand out based on the above criteria.

We have many stocks with strong buy recommendations, and you can filter them using stock screens to suit your specific investment objectives. Consider using Seeking Alpha’s ‘Ratings Screener’ tool to help find stocks that achieve diversification into desired sectors you like. Alternatively, if you’re looking for a select number of Quant Strong Buy recommendations on a monthly basis, you might want to explore Alpha Picks.

This article was written by: Steven Cress, Quant Team