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Research: Ruth’s is a Medium Well Serving but with a Raw Center

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COVID-19 Initial Impact Report​

Ruth’s Hospitality Group, Inc.

NASDAQ: RUTH

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Analyst Note
Updated Jun 01, 2020

COVID-19 Net Benefit Score: -9.05

Financial Stress Test Ratings:

Free Cash Flow: A+

Interest Coverage: A++

Summary

Ruth’s (Hospitality Group, Inc.) is the parent company of Ruth’s Chris Steak House, the largest upscale steak house restaurant company in the U.S. as measured by number of restaurants. Founded in 1965 by New Orleans, Louisiana native Ruth Fertel (after buying out the original Chris Steak House from Chris Matulich and only changing the name to Ruth’s Chris Steak House in 1976) it now has more than 150 locations, including 20 international franchisee-owned restaurants in Mexico, Hong Kong, Taiwan, Tokyo, Aruba, and Canada. The Company is said to be driven by a people-first culture and an adherence to core values of delivering the highest quality food, beverages and service in a warm and inviting atmosphere.

Market Data

Financial Data Stated in Millions

Share
Price

8.38

Market
Capitalization

243.0

Net

Debt

-58.4

Total

Debt

64.0

Cash &

Equivalents

5.6

Enterprise

Value

301.4

Basic Shares

O/S

29.00

Stock Chart

ruth-chart-20200601

Ruth’s is a Medium Well Serving but with a Raw Center

Ruth’s Hospitality Group, Inc. (“Ruth’s” or “the Company”) is a company with a focus on American steakhouse restaurants. Understandably the effect of the pandemic has been felt throughout the Company’s entire operations, resulting in a significant decline in sales and traffic. During April 2020, Ruth’s dining rooms were closed in all domestic U.S. locations, yet the Company was able to transition its services to take-out and delivery options (by recently launching online ordering and payment) as part of its plans to implement conservative cash management strategies designed to increase available liquidity and maximize financial flexibility until the pandemic abates and market conditions stabilize.

 

However, Ruth’s is a name synonymous with quality ingredients and fine dining (that ultimately gets passed onto the consumers in terms of covering costs and making profit margins accordingly), and in light of the economic and social interaction tightenings seen as a result of the pandemic the Company is at high risk in both departments. So while it might appear to have sound financial footing there has to be genuine concern about Ruth’s ability to emerge from the other side in similar good shape.

 

➤ Key Factors: Key factor analysis reveals that while the increasing WFH/SAH consumer trends are generally still good for food-related businesses, the nature of Ruth’s being strongly identified as a fine dining establishment as opposed to a QSR will certainly hurt it from an online recognition point of view. Another applicable factor to consider are the costs associated with increased health and safety regulations that will have a detrimental effect on companies like Ruth’s that operate in the hospitality sector.

 

➤ Financial Stress Test: After a significant reduction in its share price due to the pandemic Ruth’s seemingly has all the hallmarks of what it means to be an attractive investment, coupled with an EV/FCF ratio at 7.31 X (meaning the Company is only trading at just over 7 times that of its free cash flows from operations), a healthy interest coverage ratio at 23.88 X, and debt ratios likewise healthy and manageable. But these are figures taken from 2019 Audited Annual financials where the picture now (and in the foreseeable future) is one where these ratios deteriorate dramatically as cash flows are being continually suppressed, such that in the case of Ruth’s having it’s main revenue line severely hit for most of Q1 and Q2 in 2020 the fallout from this will likely see the restaurant chain failing to regain its former standing, meaning it must adapt to survive; Ruth’s is quite simply not a candidate for success here.

Ruth's Pandemic Impact Factors Review

NXTanalytic considers 7 factors and 30 specific indications that we believe will impact companies during and after the Covid-19 pandemic. These factors include: Online Business Profiles; Dealing with Consumers In Person; Effect of Increased Health Regulations; Supply Chain Risks; Changes and Disruption in Tourism, Travel and Hospitality; Increased Demand for Health Care and Health Safety; WFH and SAH.

COVID-19 Factor Analysis

Net

Benefit

NEGATIVE

Total Regression

Score

-9.05

Covid-19

Risk Rate

-9.05

Covid-19

Benefit Rate

0.00

Pandemic Impact Factor Analysis

What Ruth’s shares with all food service companies is potential impact to its supply chain, a persistent concern throughout this pandemic and even beyond. While these trends will result in greater quality assurance it will also be reflected in greater costs and supply chain adjustments that will further impact the bottom line of companies like Ruth’s (although, it’s worth pointing out, that as of May 20, 2020 the Company issued a press release stating its supply chain has not been disrupted).

Relevant Factors

➤ Online Presence: Ruth’s has been a classic bricks-and-mortar restaurant chain for several decades now and while it has recognized the need to transition over to the online world it is certainly well behind other food service entities (especially those that are primarily QSR in nature) in regards to preference and even awareness. Bottom line; consumers will always equate fine dining and expensive meals with dining out, not eating in. Ruth’s does not appear to have the presence nor suitability to compete online.

 

➤ In Person (Businesses, Crowds & Groups): Ruth’s has a hard-wired identity: a classic sit-down premium dining experience. While having to shut down many of its locations during this pandemic it has attempted to enter the delivery economy, just like the vast majority of its food service peers, yet Ruth’s will always be regarded as fine dining fare at the end of the day; it is conceptually not as transferable or relatable as ‘regular eats’ unlike many of its (affordable) QSR alternatives.

 

➤ Increased Health Regulations: With necessary increased regulations to protect the integrity of the food supply comes increased costs. In the case of Ruth’s it’s arguable those costs will be more pronounced than most due to the nature of its ingredients being of a required higher-quality (not to mention the recent raising of prices on items such as meat).

 

➤ Travel, Tourism, Hospitality and Entertainment: Another net-negative factor for the Company is the tightening of both domestic and international travel, causing a dramatic downtown in tourism numbers and affecting Ruth’s further by virtue of having a number of its locations aligned with/next to hotels throughout the world. Past pandemics have shown that while restaurants do ‘bounce back’ it can take quite a while for numbers to rebound to how they were before; in the case of this current one, it’s highly likely to see such timeframes as being in years, rather than months.

Pandemic Factor Screening and Scoring

NXTanalytic research is based on the thesis that consumer and business behaviour and practices will be changed significantly as a result of the pandemic and its aftermath. We have developed a group of seven major factors that we believe indicate whether a company has an increased risk or reward profile.

 

We approach our analysis in the context of three time periods:

 

1. Near term effect of the pandemic

2. A Resulting Recession/Bear Market

3. Longer Term Psychological Effects: Changes in consumer and business behavior and practices as a result of the pandemic.

Scoring and Rating for Factor Exposure

We objectively score businesses based on positive and negative factors and how significantly they may be affected by each applicable factor. Our model generates a total regression score by generating a coefficient of the risk and reward scores given to the company by an experienced analyst.

 

We generate a Total Regression Score, a Covid-19 Risk Rate and a Covid-19 Benefit Rate.

➤ Online Businesses: Due to social distancing and lockdowns and Work From Home, businesses that operate online, or produce the tools for companies to adapt to more demand for online services should experience a surge in demand due to the coronavirus, Covid-19 outbreak. Consumers will more rapidly move online across many categories. Trends already in place will accelerate. Companies whose businesses are online or are rapidly moving online are better prepared to serve the market while those based on bricks and mortar are more likely to be challenged. 

➤ Dealing with Consumers In Person: Businesses that deal with large numbers of people in close proximity to each other will be negatively affected long term. Regardless of how long the pandemic will continue, its psychological, economic and financial effects, have inevitably altered the perception of risk from exposure to large group settings. Consumers are going to avoid gathering in large groups – particularly individuals over 60. We believe consumers will be fearful of the virus and we are assuming that even when the rate of infection has slowed through social distancing and other “curve flattening” efforts, the virus will be a threat for more than a year or until widespread vaccination has taken place. Even after vaccination efforts minimize the immediate threat consumer behavior will be changed long term and concern over future pandemics will be heightened for many years.

➤ Increased Health Regulations and Restrictions: Restrictions on travel and trade as a result of the pandemic are likely to remain in place for months or years and public health regulations will become stricter and more widespread. It’s highly probable that enhanced screening, permit and visa requirements, reductions in ease of travel and transport of goods will be impacted or implemented. Governments, in an effort to restore consumer confidence, will enforce new regulations designed to protect consumers from the current pandemic and future pandemics will overshoot and result in impairing businesses who rely on international supply chains, movement of large numbers of people, or are otherwise perceived as presenting a high risk of infection to consumers.

➤ Supply Chain and Cross Border Risks: The fact the virus can remain alive for many days on inanimate objects and surfaces is a good example of a pending supply chain issue. Perishable product supply chains designed to move items from producer to consumer in days could be significantly impacted. Overall we believe that businesses that ship goods internationally or rely on global supply chains are at risk of business interruption as the pandemic circulates globally. Further, companies with long international supply chains in countries with poor healthcare systems will likely be pressured to replace suppliers and build new supply chains closer to home markets in order to avoid new border restrictions and the potential of localized lockdowns put in place to handle future outbreaks.

➤ Travel, Tourism, Hospitality and Entertainment: The most obviously impacted sectors are businesses on the front line of day to day consumer interaction. Restaurants, coffee shops, event venues, bars, pubs, hotels, resorts, etc could experience a prolonged or permanent change in consumer demand or be required to spend significantly on technologies and services designed to mitigate consumer concerns over health risks. Consumers will likely continue to avoid contact with crowds or reduce visits to brick and mortar hospitality and entertainment focused businesses. Companies in these sectors will need to change business practices and deploy technologies and systems designed to protect customers – many of these do not exist yet or are expensive.

➤ Work From Home and Stay At Home: The most obvious winners are companies who enable consumer cocooning or Work From Home (WFH) and Stay at Home (SAH) behaviour. As these social and business trends become entrenched, demand for a range of new solutions for managing a distributed workforce will provide existing platform companies and new entrants with opportunities to grow market share and fill demand. Companies not offering WFH opportunities will suffer, compromising their ability to attract the best employees. The delivery economy, pioneered by the likes of Amazon.com and any company that focuses on in home exercise, consumer electronics, home entertainment and ecommerce are well positioned to profit from a long term trend towards SAH behaviour. The trend towards non-brick and mortar retail, will accelerate.

➤ Health, Medicine & Safety: Companies focused on the health and safety of consumers and crowds will be positioned to assist businesses who will require new and robust health security solutions in order to attract customers. Heightened focus on health and virus risks will likely spur expenditures on antiviral medications and treatments, vaccines, screening systems and devices, rapid testing, containment and quarantine solutions and services, and telemedicine. Demand for antimicrobial or antiviral materials or other “bio tech materials” and products is likely to be strong in a post pandemic world.

Financial Stress Test

FINANCIAL RATIOS RATINGS
letter_grade_1

Excellent
Strong
Satisfactory
Poor
Low Quality
High Risk

Free Cash Flow: A+

FINANCIAL RATIOS RATINGS
letter_grade_2

Excellent
Strong
Satisfactory
Poor
Low Quality
High Risk

Interest Coverage: A++

Financial Ratios

FYE –

Dec. 31st

2019 A

Financial

Leverage

5.28 X

Debt-to-

Capital

0.40 X

Debt-to-

Assets

0.13 X

Debt-to-

Equity

0.68 X

EBIT/

Interest

23.88 X

EV/

FCF

7.31 X

NXTanalytic reviews a series of financial measures designed to provide a snapshot of the company’s financial health and ability to deal with the challenges or opportunities created by the pandemic, the recession and post pandemic economic environment.

Our opinion

Ruth’s has declared it has taken steps towards implementing cash management strategies designed to increase available liquidity and maximize financial flexibility until the pandemic abates and market conditions stabilize, most notably recently venturing into online operations as it attempts to follow the herd of many other food-related companies that allow for take-out and delivery options. However, it’s still going to be difficult for the Company to attract consumers that are more used to ordering in burgers than steaks, such that unless Ruth’s undertakes a dramatic (and successful) business model shift to reach beyond the loyal yet narrowly represented baby boomer generation it has so richly targeted for decades (i.e. Under 20% of the American public are considered baby boomers) then it must be very careful indeed from here on out to both ride out the pandemic storm and continue to stay afloat, and even then consumer behaviour in terms of wanting to physically return to such establishments in dense numbers is uncertain.

 

The Company’s finances provide more hope on the surface yet with a vitally important caveat that despite appearing to be well positioned as a worthwhile investment due to its stock price having been reduced (by more than half) over the past few months, the worry (and expectancy) is that revenues simply won’t return to levels that will adequately offset the ‘value’ gained from buying these shares cheaply.

Stress Test Highlights

➤ Debt-to-Assets: The company has a solid debt ratio sitting at 0.13 X showcasing its large asset base. Other leverage ratios such as Debt-to-Equity are more pronounced at 0.68 X but are still suitably low.

➤ EV/FCF: Free Cash Flow valuation ratios are a representation of the discount of the enterprise’s value to its cash flows and Ruth’s has an attractive ratio at 7.31 X. This is due to the stock price of the Company having decreased in recent times and its cash flows remaining stable (yet almost certainly impacted in recent times and likely to be hit even further in the future).

➤ Interest Coverage: The interest coverage ratio of the Company is strong and stable at 23.88 X suggestive of Ruth’s being able to fund its debts or financial obligations, but again its increasingly suppressed cash flows must be taken in account here and so this ratio (as well as all the others) will look worse in this current climate.

Financial Stress Test Analysis

NXTanalytic completes a financial analysis of each company using data taken from the most recently audited financial statements. Our goal is to provide a snapshot of a company’s financial condition and ability to survive a prolonged period of reduced growth, and/or finance growth or restructuring to take advantage of new opportunities.

Cash Flows as a Focus of Screening

Debt Servicing

➤ Interest Coverage Ratio = EBIT / Interest Expense: A powerful measurement of the ‘survivability’ of a corporation. It reflects the ability of a company to pay interest on the outstanding debt and is thus an important assessment of short-term solvency. If the ratio is underneath 1.0 X, this means that the company cannot currently cover interest charges on its debt from current operational income. This could mean that the company is funding itself through the sale of assets or further financing; which are unsustainable. The higher the ratio, the higher probability to survive in the future financial hardship.

Free Cash Flow Valuation

➤ Interest Coverage Ratio = EBIT / Interest Expense: A powerful measurement of the ‘survivability’ of a corporation. It reflects the ability of a company to pay interest on its outstanding debt and is thus an important assessment of short-term solvency. If the ratio is underneath 1.0 X, it indicates the company cannot currently cover interest charges on its debt from operational income. This could mean that the company is funding itself through the sale of assets or further financing; which are unsustainable measures. The higher the ratio, the higher the company’s ability to survive financial hardship.

➤ EV/FCF Ratio = Enterprise Value / Free Cash Flow: Based on our debt servicing thesis we primarily value companies based on their cash flows. We rely on the EV/FCF ratio to assess the total valuation of the company in relation to its ability to generate cash flows. Enterprise Value is the value of the entire company, both its debt and traded equity. When this is divided by its Free Cash Flow we see how much we are paying to buy that cash flow. The lower the ratio the cheaper it is to “buy” the cash flows of the company.

Leverage Ratios

Debt ratios are classic balance sheet health measuring tools used to indicate potential risks to future financing ability (ie. violating debt covenants) or as a barometer of the defensive position of the company if cash flows are ever an issue. They are long-term solvency metrics and reflect the degree to which the company is financing its operation through debt versus equity. If a company has poor leverage ratios (too much debt), it might need to aggressively finance its growth through debt and as a result require more and more cash flow from operations to adequately service its debt. Our view is that companies with less debt are more likely to be able to withstand challenges or fund opportunities created by the pandemic.

➤ Financial Leverage Ratio = Total Debt / Total Equity: The Financial Leverage Ratio is a measure of the degree to which a company is financing its operations through debt. More specifically, it reflects the ability of shareholder equity to cover all outstanding debts in the event of a business downturn.

➤ Debt-to-Capital Ratio = Total Debt / (Total Debt + Total Shareholder’s Equity): The Debt-to-Capital ratio measures the amount of financial leverage in a company. This tells us whether a company is prone to using debt financing or equity financing. A company with a high Debt-to-Capital ratio, compared to a general or industry average, may be impared due to the cost of servicing debt and therefore increasing its default risk.

➤ Debt-to-Equity Ratio = Total Debt / Total Shareholder’s Equity: A high Debt-to-Equity ratio generally indicates that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of additional interest expense. If the company’s interest expense grows too high, it may increase the company’s chances of a default or bankruptcy.

➤ Debt-to-Assets Ratio = Total Debt / Total Assets: The Debt-to-Assets ratio shows the degree to which a company has used debt to finance its assets. This ratio can be used to evaluate whether a company has enough assets to meet its debt obligations. A ratio greater than 1 indicates that the entire company’s assets are worth less than its debt.

CONFLICT OWNERSHIP RELATED DISCLOSURES

Does the Analyst or any member of the Analyst’s household have a financial interest in the securities of the subject issuer?

No

Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer?

No

Does NXTanalytic or the Analyst have any actual material conflicts of interest with the issuer?

No

Does NXTanalytic and/or one or more entities affiliated with NXTanalytic beneficially own common shares (or any other class of common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer?

No

Has the Analyst had an onsite visit with the Issuer within the last 12 months?

No

Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months?

No

Has the Analyst received any compensation from the subject company in the past 12 months?

No

U.K. DISCLOSURES

This research report was prepared by NXTanalytic Inc., which is not a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. NXTANALYTIC IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS. The contents hereof are intended solely for the use of, and may only be issued or passed onto persons with which NXTanalytic has given consent. This report does not constitute advice, an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.

CANADIAN & U.S. DISCLOSURES

This research report was prepared by NXTanalytic, which is not a registrant nor is it a member of the Investment Industry Regulatory Organization of Canada. This report does not constitute advice, an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. NXTanalytic is not a registered broker-dealer in the United States or any country. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of research analysts.

INFORMATION & INTELLECTUAL PROPERTY

All information used in the publication of this report has been compiled from publicly available sources that NXTanalytic believes to be reliable. The opinions, estimates, and projections contained in this report are those of NXTanalytic Inc. (“NXT”) as of the date hereof and are subject to change without notice. NXT makes every effort to ensure that the contents have been compiled or derived from sources believed to be reliable and that contain information and opinions that are accurate and complete; however, NXT makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Information may be available to NXT that is not herein. This report is provided, for informational purposes only and does not constitute advice, an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction. Its research is not an offer to sell or solicitation to buy any securities at any time now, or in the future. Neither NXT nor any person employed by NXTanalytic accepts any liability whatsoever for any direct or indirect loss resulting from any use of its research or information it contains. This report may not be reproduced, distributed, or published without any the written expressed permission of NXTanalytic Inc. and/or its principals.

 

©2020, NXTanalytic. All rights reserved.

 
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Economics

Top Energy Stocks to Watch in 2022 to Capture the Electrifying Growth

Despite being one of the worst-performing sectors over the past 10 years, the top energy stocks are now leading the stock market.
The post Top Energy Stocks to Watch in 2022 to Capture the Electrifying Growth appeared first on Investment U.

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Despite being one of the worst-performing sectors over the past 10 years, the top energy stocks are now leading the stock market. With inflation hitting a 39 year high in the U.S, cyclical stocks are back on top.

In fact, the Energy Select Sector SPDR Fund (NYSE: XLE) is up over 55% in the past year. Even more, the top energy stocks are off to a good start in 2022, pushing the ETF up over 13% so far.

After oil prices fell drastically when the pandemic first hit, prices are climbing back to their highest price since 2014. With this in mind, high inflation readings tend to benefit commodity stocks as investors look for less risk.

Not only that but with interest rates likely going up this year, crowded trades like tech stocks are getting clobbered.

Having said that, diversifying your portfolio with commodities can help buffer the impact. Keep reading to find the top energy stocks to watch in 2022 to boost your returns.

Top Energy Stocks for Growth Investors

Tech isn’t the only sector with growth leaders. Several energy stocks are leading the charge as profit margins are improving and more is being returned to shareholders. Given this, here are the top energy stocks for capturing growth.

Devon Energy (NYSE: DVN)

  • Market Cap: 34.5B
  • 1 Yr. Return: 167%
  • 1 Yr. Revenue Growth: 214%

Devon Energy is outperforming the market, making it one of the top energy stocks. It’s surging by 167% in the past year to lead the S&P 500 index. The oil and gas exploration company holds a diverse portfolio of oil volumes (50%), gas volumes (26%) and NGL volumes (24%).

However, DVN is making strategic moves to further its position. A few weeks ago, Devon merged with rival WPX Energy to create one of the largest shale producers in the U.S. Although the deal dilutes ownership, it will help boost cash flow with a larger presence in the Permian Basin.

More importantly, the company is using the excess cash flow to reward shareholders. For example, Devon announced a $1 billion share buyback program on top of a 71% dividend increase.

The company now pays a generous dividend yielding around 7% as DVN expects the growth to continue.

Diamondback Energy (Nasdaq: FANG)

  • Market Cap: 22.6B
  • 1 Yr. Return: 112%
  • 1 Yr. Revenue Growth: 165%

Diamondback Energy is another oil exploration company with an interest in the Permian Basin. So far, the company’s reserves include 58% oil, 20% natural gas, and another 22% natural gas liquids.

Like Devon, FANG stock is outpacing the competition, up 112% in the past year. Strong demand is pushing crude oil prices higher, helping boost the company’s cash reserves. Diamondback’s latest earnings shows the company has $457 million in cash. The company is planning to use the money to pay down debt and return to shareholders.

With this in mind, FANG is committing to a 50% free cash flow return for investors. The company pays a $2 annual dividend thus far, yielding around 1.6%.

Top Energy Stocks for Value Investors

The growth vs. value debate is an ongoing controversy among investors. Growth stocks have had the edge the past few years, but value stocks are outperforming growth so far this year. That said, here are the top energy stocks for value investors.

Exxon Mobile (NYSE: XOM)

  • Market Cap: 311.58B
  • 1 Yr. Return: 62%
  • 1 Yr. Revenue Growth: 58%

As one of the world’s largest publicly traded oil companies, Exxon Mobile, is involved in all aspects of the process. The company’s business segments include upstream, downstream, and chemical.

With gas prices increasing over their 10-year range, Exxon is seeing improved margins across all segments. Exxon also used the excess free cash flow in the third quarter to improve fundamentals. In light of this, XOM paid down its debt by $4 billion, bringing debt to capital to 25%.

Not only that, but this top energy stock distributed another $3.7 billion in dividends. With its latest dividend increase to $0.88 per share, the payout yields nearly 5%.

And on top of this, several investments are starting to pay off in Guyana and the Permian. The offshore projects are creating promising growth potential in the next few years.

Phillips 66 (NYSE: PSX)

  • Market Cap: 38.85B
  • 1 Yr. Return: 24%
  • 1 Yr. Revenue Growth: 90%

Phillips 66 is another one of the top energy stocks. It’s best known as an oil refiner. But the company is branching out into other revenues sources such as chemicals and midstream. So far, PSX operates 13 refineries in the U.S. and Europe with production capabilities of 2.2 million barrels of crude oil per day.

As more people get back to their everyday lives, gasoline demand rises. And as a refiner, PSX is at the heart of production. So, the higher demand is significantly improving earnings and margins.

Like the other energy companies on this list, PSX uses extra cash to improve its balance sheet. In the company’s Q3 earnings, PSX noted paying down debt by $1 billion so far in 2021.

Another key thing to note from the report, PSX is buying out all public partners. The move will help integrate the business while further improving margins.

PSX also offers an attractive annual dividend of $3.68 per share, or a 4.15% yield/

Risks to Consider When Investing in Energy Stocks

Although the stocks listed are up significantly in the past year, these are also the top energy stocks right now. Investing in the energy sector can be challenging with so many changing variables.

Having said that, the sector is heavily influenced by changes in the economy. When the pandemic first hit, oil prices cratered, causing businesses to take on more debt. You can see how easily things can change from March 2020 to where we are now.

Now that oil prices are recovering, we are seeing improving margins. And as a result of the extra cash, companies are reducing debt while rewarding investors.

The past ten years have not been very rewarding for energy investors. But, with OPEC capping supply levels, it looks like higher margins will continue this year. If demand remains strong, we will likely see much of the same in 2022.

The post Top Energy Stocks to Watch in 2022 to Capture the Electrifying Growth appeared first on Investment U.

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Government

Top 4 Oil Stocks to Buy for Profiting from Exploration and Production Growth

Top 4 oil stocks to buy for profiting from exploration and production growth offer a potential gusher of opportunity. The top 4 oil stocks to buy for profiting from exploration and production (E&P) growth should be fueled by a 22% rise in global drill

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Top 4 oil stocks to buy for profiting from exploration and production growth offer a potential gusher of opportunity.

The top 4 oil stocks to buy for profiting from exploration and production (E&P) growth should be fueled by a 22% rise in global drilling & completion (D&C) spending in 2022 to mark the strongest annual jump since 2006, according to BofA Global Research. After a couple of tough years for the oilfield services (OFS) industry, BofA is predicting that this year could be one of robust D&C spending growth.

Unlike the prior cycle that was dominated by U.S. D&C spending growth, international spending is expected to be strong in 2022. As a result, BofA is projecting a broadened D&C spending recovery in 2022, including U.S. and international growth of 37% and 15%, respectively.

Top 4 Oil Stocks to Buy for Profiting from Exploration and Production Spending

E&P companies in the oil and gas industry are engaged in the early stage of energy production known as the upstream segment of the business. E&P involves searching for and extracting oil and gas from the ground. 

Typically, E&P companies do not refine or produce energy but instead focus on finding and extracting raw materials. Midstream activities follow with companies that specialize in storing, processing and transporting the crude oil and raw natural gas products. The function of midstream companies is to operate tanker ships, pipelines and storage facilities to help move those raw materials and prepare them for the downstream process that refines the resources into fuels and finished products for marketing, distribution and sale.

Energy is one of the limited number of industries that are benefitting from the current rising yield environment. Increased prices have helped oil stocks and are producing buying opportunities for investors, according to the Jan. 18 issue of the Fast Money Alert trading service led by Mark Skousen, PhD, and Jim Woods. 

Mark Skousen, a descendent of Benjamin Franklin, meets with Paul Dykewicz.

Top 4 Oil Stocks to Buy for Profiting from Exploration, Production and Inflation

Crude oil prices are surging on a combination of rising inflation, steady demand and a constricted supply, Skousen and Woods opined.

“Those rising prices have created a bullish setup in several oil stocks,” wrote Skousen and Woods. Skousen, named one of the world’s Top 20 living economists by www.superscholar.org, is the leader of the Forecasts & Strategies investment newsletter, as well as the Five Star Trader, TNT Trader and Home Run Trader advisory services. Woods writes the Successful Investing and Intelligence Report investment newsletters, as well as heads the Bullseye Stock Trader and High Velocity Options advisory services.

Jim Woods and Paul Dykewicz discuss stocks to buy now.

BofA reports it has been watching the private U.S. exploration and production companies closely, forecasting their rig activity is now above pre-COVID levels. However, the public U.S. E&Ps are still 45% below pre-COVID levels.

While public E&Ps will take their activity levels modestly above maintenance, likely producing 20%-plus year over year (y/y) growth in the group’s capital expenditures (capex), private E&Ps should provide the biggest increases in 2022. For example, BofA expects private E&P capex to surge by roughly 55% in 2022. Overall, U.S. E&P capex is projected by BofA to rise 37% this year, including 10% due to inflation.

Top 4 Oil Stocks to Buy for Profiting from Exploration and Production

Energy stocks had a strong finish to 2021 and most of the reasons for it continue in 2022, said Bob Carlson, who heads the Retirement Watch investing newsletter. Inflation is likely to remain high for much of 2022 and perhaps longer, helping to power energy stocks that traditionally serve as a good inflation hedge for such conditions.

“In addition, capital investments in the energy sector lagged the last few years, continued Carlson, who also serves as chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets. “Capital investments aren’t going to surge enough to increase supply anytime soon. In fact, some governments are discouraging or prohibiting additional investments in traditional energy sources, and many banks and other capital sources reduced their exposure to the sector as part of their environmental policies.”

The result is demand likely will surpass supply for a while, absent a recession, Carlson counseled. Many energy companies, especially the shale oil producers, have made clear that they will be more friendly to shareholders going forward. Instead of investing heavily to maximize production, they will focus more on profitability and ensuring shareholders have cash distributions and stock price appreciation, he added.

Pension fund and Retirement Watch chief Bob Carlson answers questions from columnist Paul Dykewicz.

BofA’s Top 4 Oil Stocks to Buy for Profiting from Exploration and Production

With BofA preferring oil stocks that have more exposure to the United States E&P market, it recommended Halliburton (NYSE: HAL), with dual headquarters in Houston and Fort Worth, Texasa. BoA rated HAL as a buy and the “best-in-class” North American, large-cap E&P stock.

The investment firm released a research report recently that described Halliburton as its favorite offshore large-cap investment in the sector. One reason is that U.S. E&P capital discipline has reduced the sensitivity of domestic activity to oil prices, it noted.

But with oil now at $80, U.S. onshore activity may have underappreciated upside that will help to drive further gains for HAL’s consensus estimates, BofA continued. Amid that positive outlook, BofA reiterated its buy rating and raised its 2022 / 2023 earnings per share (EPS) and earnings before interest, taxes, depreciation and amortization (EBITDA) estimates to $1.85 / $2.66 and $3,659 million / $4,770 million, respectively.

For those who like value-added charts, Stock Rover has provided such visual demonstrations of the recent track record of HAL and BofA’s other three recommended oil stocks of BofA. 

The Williams indicators in the illustrative Stock Rover charts show momentum, with 0 to -20 (shaded in red) considered overbought and -80 to -100 regarded as oversold. The accompanying Stock Rover charts also are overlaid with a volume indicator.

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In addition, charts that feature Keltner Channels are a more informative variation on moving average lines.

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NEX Joins Top 4 Oil Stocks to Buy for Profiting from Exploration and Production

Among the smallest 2,500 stocks within the broad S&P benchmark, three of those small- and mid-cap oil companies focusing on D&C received buy recommendations from BofA. One of them is Houston-based NexTier (NYSE: NEX), a land oilfield service company that has a diverse set of well completion and production services.

NexTier gained a buy recommendation from BofA partly as the “best way” to invest in tightening pumping fundamentals. Specifically, BofA is positive on U.S. hydraulic fracturing (a.k.a. pressure pumping) fundamentals. Basically, attrition is tightening the fracturing market much more quickly than investors might expect even though the crew count is still well below 2019 levels. 

Despite NEX’s recent rise, the stock still appears undervalued, BofA added. Continued execution and market tailwinds should help this “exceptionally cheap” stock re-rate as consensus estimates move higher this year, the investment firm added.

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As such, BofA affirmed its buy rating on NEX and raised its 2022 / 2023 EBITDA estimates to $329.9 million / $426.1 million.

Chart generated using Stock Rover.

Top 4 Oil Stocks to Buy for Profiting from Exploration and Production: PTEN

Patterson UTI (NASDAQ: PTEN), a Houston-based provider of oilfield services and products to oil and natural gas E&P companies in the United States and other select countries, offers contract drilling, pressure pumping and directional drilling services. BofA wrote that rig count upside exists to drive day-rate momentum for PTEN.

The company is rated as BofA’s favorite land driller. Key reasons are (1) higher leverage to U.S. private E&Ps, (2) lower capex requirements, especially when compared to competitors, and (3) cheaper valuation than its closest peer, BofA opined.

“Furthermore, we think U.S. horizontal rig activity could end the year around 650 rigs, which implies more than 100 rigs added between now and the end of the year,” BofA wrote in a recent note. “And if activity plays out like we think this year, we expect day rates to climb into the mid-$20,000 range as total Super Spec rig utilization eclipses 90%.”

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Upon taking all these factors into account, BofA reiterated its buy rating, while raising its 2022 / 2023 EBITDA estimates on the stock to $426.7 million / $594.3 million.

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Top 4 Oil Stocks to Buy for Profiting from Exploration and Production: WHD

Cactus Wellhead (NYSE: WHD), of Houston, designs, manufactures, sells and rents a range of highly engineered wellhead and pressure control equipment. Its products are sold and rented principally for onshore unconventional oil and gas wells and are used during the drilling, completion and production phases of its customers’ wells.

In addition, Cactus Wellhead provides field services for all its products and rental items to assist with the installation, maintenance and handling of the wellhead and pressure control equipment. BofA forecasts U.S. drilling upside that could give WHD’s margins tailwinds.

WHD, with a 40%-plus share of the U.S. wellhead market, is set to benefit from continued momentum in U.S. drilling activity, BofA predicted. Plus, the investment firm forecast that the company’s product segment could be helped if its input costs, such as steel, come down even as Cactus Wellhead has had success boosting prices to offset inflationary pressures, BofA added.

“Keep in mind, though, that typically WHD does not have to concede some of the price gains captured previously as input costs come down, which is a possible added catalyst for margins in 2022,” BofA wrote. “Therefore, we reiterate our buy rating.”

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BofA raised its 2022 / 2023 EBITDA estimates to $193.4 million / $272.5 million.

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Underappreciated Free Cash Flow Growth for the Oilfield Service Sector

With the oil and gas industry entering its “twilight years” amid a global push toward clean energy sources, investors have begun to focus more on free cash flow and less on growth, BofA wrote. With activity on the rebound and oilfield service pricing set to climb this year, the oilfield services sector is positioned to generate significant growth in free cash flow.

At this point in the cycle, cash flow growth really doesn’t require much, if any, growth capex, BofA added. Plus, use of the U.S. dollar to price oil favors such stocks, so any decline in the greenback compared to other currencies should increase the prices of oil and other forms of energy.

There are 21 stocks in the energy sector of the S&P 500. At the end of 2021, those stocks had a combined market value of about $1 trillion. That’s about a third of Apple’s (NASDAQ: AAPL) $3 trillion market value and a little more than the 2021 increase in the technology company’s market capitalization, Carlson commented.

 Omicron Variant of COVID-19 Dominates U.S. Cases

The economy is affected by the Omicron variant of COVID-19 causing 99.5% of new coronavirus cases in the United States last week to show a slight increase from the previous week, according to Jan. 18 estimates from the U.S. Centers for Disease Control and Prevention. The Delta variant accounts for the remaining 0.5%.

An average of 750,000-plus new COVID-19 infections were reported every day over the past week, according to data from Johns Hopkins University. The U.S. Department of Health and Human Services reported that 156,000 people were hospitalized with COVID-19 on Jan. 16, based on the most recent data available at press time.

Reports indicate that the recent surge in COVID cases is causing some hospitals to run out of space to treat other patients in intensive care units. A squeeze also is occurring in the travel industry due to canceled flights from rising COVID cases, as workers at airlines, airports and related retailers call in sick.

COVID-19 Concerns Continue as Cases and Deaths Keep Climbing

The Centers for Disease Control and Prevention (CDC) reported that the variants still are spurring people to obtain COVID-19 boosters. But more than 60 million people in the United States remain eligible to be vaccinated but have not done so, said Dr. Anthony Fauci, the chief White House medical adviser on COVID-19.

As of Jan 18, 249,393,487 people, or 75.1% of the U.S. population, have received at least one dose of a COVID-19 vaccine, the CDC reported. Those who are fully vaccinated total 209,312,770, or 63% of the U.S. population, according to the CDC.

COVID-19 deaths worldwide, as of Jan. 18, topped the 5.5 million mark to hit 5,554,152, according to Johns Hopkins University. Worldwide COVID-19 cases have zoomed past 333 million, reaching 333,705,640 on that date.

U.S. COVID-19 cases, as of Jan. 18, soared beyond 67.5 million, totaling 67,581,992 and causing 853,951 deaths. America has the dreaded distinction as the country with the most COVID-19 cases and deaths.

The four stocks to buy for profiting from oil exploration and production growth give investors a chance to buy shares in stocks that are in an industry that until recently had lost favor due to its use of fossil fuels in an era of climate consciousness. Open-minded investors willing to invest in those stocks while they are on the rise and many other sectors are struggling could outperform the market this year.

The post Top 4 Oil Stocks to Buy for Profiting from Exploration and Production Growth appeared first on Stock Investor.

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Manganese Outlook 2022: Expect Price Corrections, Recovery in Supply

Click here to read the previous manganese outlook.After uncertainty due to COVID-19 in 2020, the manganese space saw a strong rebound in demand in 2021. Despite not being widely known, manganese is extensively used in metallurgy. In fact, it is the fourth

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Click here to read the previous manganese outlook.

After uncertainty due to COVID-19 in 2020, the manganese space saw a strong rebound in demand in 2021.

Despite not being widely known, manganese is extensively used in metallurgy. In fact, it is the fourth most common metal by tonnage, just after iron, aluminum and copper.

What will happen to manganese this year? To find out, the Investing News Network (INN) reached out to analysts in the space to get their thoughts on what’s ahead for the battery metal in 2021.


Manganese trends 2021: The year in review


Volatility was high in the manganese market in 2020, with many analysts predicting at the end of the year that 2021 would see a recovery in steel demand and oversupply in the market.

Looking back at how the market performed in 2021, Clare Hanna of CRU Group told INN that prices for manganese ferroalloys and manganese metal rose to far higher peaks than expected and stayed elevated for longer because of the strength of demand and supply chain costs and bottlenecks.

“It was only in Q4 that we started to see prices begin to come off the peak, and even then not everywhere,” she said. “The US market with its high dependence on imports and its higher preference for contract over spot purchasing has been insulated from the falls elsewhere so far.”

Manganese metal price rises in 2021 were quite staggering. According to CRU, FOB China prices for manganese metal were 217 percent higher by the end of the year, and were 269 percent higher at their November peak.

“Chinese producers dominate supply of this product, and producers were affected by the power crisis and also some coordinated maintenance outages,” Hanna said. “Together, these drove prices up. European and US consumers then had to pay for the high additional container costs on top of this.”

Manganese is mostly mined in South Africa, Australia, Gabon and Ghana, with global production reaching around 18.5 million tonnes in 2020. About 90 percent of manganese is consumed in ferroalloys, while only around 10 percent is used for specialty products, including electrolytic manganese metal (EMM) and manganese sulfite monohydrate (MSM). High-purity EMM and MSM can be used in lithium-ion batteries.

According to CPM Group, global manganese ore production increased by 7 percent in 2021 (up to November), although China’s output went down 15 percent.

“That's significant, because China is the largest steel producer and the largest consumer of manganese for steel applications, so it's important for them to have their domestic production,” Andrew Zemek, special advisor at CPM, explained to INN. Production went down for all sorts of reasons, including power shortages, winter plant closures and environmental restrictions.

“China’s imports also went down, and that's significant because it very much relies on imports of manganese ore. China accounts for 74 percent of global imports of manganese,” he added.

In 2021, the main surprises that affected the manganese market were the speed and duration of the bounce-back in demand from the steel industry outside China. “(That was in contrast to) the extent of the slowdown in steel production in China in H2, and then the container and freight market crises that drove prices up and built huge delays into the shipping of manganese alloy products,” Hanna said.

As a result, manganese ferroalloy supply struggled to catch up with demand outside China, leading manganese alloy prices to rise right through to November.

“Initially this was because supply chain stocks were low and producers were operating at lower levels; then container shipping delays meant ordered material didn’t arrive when planned,” Hanna said.

By contrast, manganese ore prices were more closely linked to developments in China.

“Compared to iron ore, prices were relatively flat, even with higher freight costs,” Hanna said. “We had identified additional supply coming onstream from Eramet (EPA:ERA), and new mines in South African and potentially Australia ― all of this new capacity started and contributed to keeping supply in balance.”

The speed of the steel industry's recovery also took CPM’s Zemek by surprise, as all indicators pointed to demand staying flat or declining, with global demand growing by 7 percent. “But again, in China, there was a very mixed picture,” he said. “The first half of the year was about a 15 percent year-on-year increase, and the second half was a 16 percent year-on-year decline, so all in all no growth of steel in China.”

Within steel, stainless steel production grew by 17 percent during the first three quarters of the year, higher than the 6 percent seen in carbon steel ― a trend that Zemek has been following for some time. “Manganese ore prices were relatively stable compared to other manganese products, which is a reflection of the positive and stable situation on the mining side,” he said. “But nonetheless, prices went up 20 percent compared to January 2020.”

Even though ore prices didn’t grow as much in 2021 as they did the previous year, products made from manganese ore saw prices surge.

“Silicomanganese, the largest of the ferroalloys, had a price spike in October (last) year, trading at 100 percent higher than in January 2020, (and) increasing 14 percent during 2021,” Zemek said.

Meanwhile, high-carbon ferromanganese remained flat in 2021, but prices were still up 20 percent compared to January 2020. Refined ferromanganese had a price spike in October, coming in 150 percent higher than in January 2020, and ended the year 27 percent higher than it was in January 2021, according to CPM data.

“Production is up significantly and prices are not drastically up, but still going up ― to me this signifies a very healthy market,” Zemek said.

Manganese specialty products have also had an impressive run since January 2021, with EMM soaring 225 percent and high-purity MSM rising 68 percent.

Manganese outlook 2022: What’s ahead for demand, supply and prices


Looking over to how prices could perform in 2022, CRU is forecasting that manganese ferroalloy prices will correct significantly as the markets come back into balance and logistics bottlenecks ease.

“Manganese metal demand outside China will remain strong, but Chinese producers should be less affected by power shortages and emission control policies after Q1, so if they increase output we would expect prices to fall,” Hanna said. “If they continue with major maintenance shutdowns, the picture could be very different.”

CRU is expecting global steel production to grow in 2022, in spite of a forecast reduction in production in China, because India and Southeast Asia, along with new capacity coming onstream in the US and the continuing recovery in Europe, will all require more manganese.

“Construction is a key driver, but once the chip shortage eases, we expect steel consumption in the automotive sector to recover,” Hanna said. “However, we think there are a significant number of cars being completed except for the chips, so steel and therefore manganese requirements, such as manganese metal, may lag.”

With demand being strong and prices remaining high even after a correction, CRU expects good supply this year.

“New manganese alloy capacity is planned in Malaysia and India, and Satka are buying the mothballed Metalloys plant in South Africa with the intention of restarting it,” Hanna said. “Element 25 (ASX:E25,OTC Pink:ELMTF) are planning the next phase of the manganese mine development in Australia that will double capacity at this mine.”

CRU is also expecting manganese mine output in Brazil to recover. Looking ahead, the firm is forecasting ferroalloys markets to be more closely balanced; however, a slight surplus in ore markets is expected.

A major area of interest for investors has been the use of manganese in electric vehicle (EV) batteries. That said, as previously mentioned, it is important to note that not all manganese can be used in EV batteries — only high-purity specialty products can be used, mainly EMM and MSM.

Given the EV demand growth forecast, CPM is expecting a compound annual growth rate of about 43 percent for high-purity manganese products in the next five years.

Speaking specifically about the battery sector in coming years, CPM’s Zemek sees a huge deficit of high-purity manganese for the battery industry.

“When we look at the project pipeline, it's very thin. There are very few projects which are close to production; there are a few more which are early stage exploration,” he said. “The deficit is going to be so big that to fill it by 2030 the global production of high-purity manganese products, which is mostly the sulfate, will need to grow more than 10 times to meet that demand.”

These strong fundamentals will likely push high-purity manganese prices further up.

Manganese outlook 2022: Factors to watch


In terms of factors to watch that could impact the manganese market, Hanna said investors should look out for news of Chinese companies building ferroalloy capacity outside of China to take advantage of green energy.

“(Additionally), there are a number of projects to build manganese metal and manganese sulfate capacity outside of China to support EV supply chains,” Hanna said. “Watch for any of these moving to or beyond pilot plant phases.” She is also keeping an eye on Australia, where a number of mine projects have looked at how fast Element 25 was able to get its Butcherbird mine up and running, and are wondering if they could do the same.

Commenting on the biggest risk in the manganese market, Hanna said a sharper slowdown in China — especially the construction sector, which uses rebar, a heavy consumer of silicomanganese — is a catalyst to watch.

Don’t forget to follow us @INN_Resource for real-time updates!

Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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