The world economic scene, and the geopolitical factors that go along with it, is presenting a bumpy road for market investors to navigate. Those bumps have been wide-spread through the global economy. The combination of headwinds and opportunities, however, should open new vistas for investors.
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Hydrocarbon energy sources, mainly crude oil and natural gas, remain the mainstay of our economy despite a major push to increase the proportion of wind and solar power. At the same time, Russia’s war in Ukraine is crimping supplies, especially of natural gas. The key for investors’ success will be finding companies and stocks involved in boosting hydrocarbon production – a necessity for the industry, as it works to maintain stable and reliable power and fuel supplies.
We’ll turn our attention to a pair of under-the-radar energy stocks, companies that have not picked up much attention from the Street – but both boast Buy ratings and upside potential of 40%, or more, going forward. Here are the details.
KLX Energy Services Holdings (KLXE)
The first stock we’ll look at is a small-cap oilfield services provider, providing mission-critical support services in the US onshore hydrocarbon sector. KLX’s services include completion, intervention, and production activities, enabling efficient activity at the most technically demanding wells. KLX operates in some of the richest oil and gas regions in the US, including the Permian Basin and Eagle Ford Shale of Texas; the Bakken, Williston, DJ, and Uinta formations of the Rocky Mountains; the Marcellus and Utica shale formations of the Appalachians; and the Stack and Scoop formations in the Mid-Continent area. The company has a total of 35 service facilities.
The energy industry is known for dripping cash, and KLX has seen its revenues increase steadily. The company will report its 4Q22 and 2022 full year numbers in March, but in the last reported quarter, 3Q22, KLX showed a top line of $221.6 million, for a 20% sequential gain – and an even more impressive 59% year-over-year gain. At the bottom line, the net income per common share came in at 96 cents, a solid gain and a favorable comparison to the steep net losses of previous quarters. 3Q22 marked a shift for KLX, from net losses to profitability; Q2 saw a diluted EPS loss of 67 cents, and 3Q21 an EPS loss of $2.08. At the end of Q3, KLX reported $41.4 million in net cash holdings, compared to $28 million at the end of 2021.
This company’s strong position reflects a combination of factors that have supported the energy industry in the past year, even as economic headwinds have mounted. Prominent among those factors are continued strong demand and pricing power.
That forms the background for the comments by EF Hutton analyst Ignacio Bernaldez, who says of this company: “We remind investors that KLX’s management has a demonstrated history of strong capital allocation, successful acquisitions (the KLXE and QES merger for example), and strong exposure to all major US basins. Additionally, we look favorably on KLXE’s ongoing pricing power. Gross margins have expanded from 11.4% in the 1Q22 to 23.8% in 3Q22. Management has taken a proactive approach to gross margin expansion as demonstrated by consolidation of weaker business lines, strong technical experience, and product diversification…”
Bernaldez goes on to add, “We reiterate our belief that KLXE is well-positioned to generate improving free cash flow given sector tailwinds, margin expansion, and tightening capital spend. This improved cash position will de-lever the company and should further unlock equity value.”
To this end, the analyst gives KLXE shares a Buy rating, with a price target of $30 to imply a one-year gain of 115% for the stock. (To watch Bernaldez’s track record, click here)
Small-cap oilfield services providers don’t always get a lot of analyst attention. There are only two analyst reviews on file here, and they include 1 Buy and Hold, each, all coalescing to a Moderate Buy consensus rating. KLX shares are priced at $13.95, with an average price target of $24.50 indicating a runway toward ~76% upside for the next 12 months. (See KLXE stock forecast)
Vitesse Energy, Inc. (VTS)
Next up is Vitesse Energy, a non-operator that owns financial interests in producing US oil and gas wells, which are drilled by leading operator firms in the US hydrocarbon industry. Vitesse focuses on driving shareholder returns, leveraging data, tech, and experience to evaluate, acquire, and integrate its revenue-generating asset portfolio. The company was established in 2013, and since then it has increased its holdings to more than 50,000 net acres with more than 6,000 gross producing wells.
Vitesse started as a private equity firm, based on diversified investment holdings, which are researched and evaluated in-depth before their acquisition. Vitesse works to manage its capital investments to advantage, and has seen its equity investment increase from the original $50 million to more than $500 million, with returns to shareholders totaling more than $124 million.
Vitesse spun off from its main shareholder, Jefferies Financial Group, and became a publicly traded company as of January 17 of this year. The completion of the spin-off has put the company in the public eye, although it will take time for interest to build up.
In the meantime, Vitesse has picked up its first stock review, from Northland analyst Donovan Schafer, who writes: “It is our view that VTS is undervalued vs. intrinsic value post-spin from Jefferies. VTS is trading at $16 vs. our valuation of $23 based on modest assumptions. We believe the low price is due to selling from Jefferies investors that had no interest in owning a non-op oil and gas co like VTS after receiving the shares as a dividend from Jefferies. We expect VTS to reach $20 and more once the initial churn subsides.”
Schafer’s $23 price target implies 41% potential upside for Vitesse Energy shares, and fully supports his Outperform (i.e. Buy) rating. (To watch Schafer’s track record, click here)
Some stocks fly under the radar, and VTS is one of those. As mentioned above, Schafer’s is the only recent analyst review of this company, but it is decidedly positive. (See VTS stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
