Top 4 Halloween Stocks to Watch for Sweet October Gains

Posted on by The INO.com Team

As October unfurls, Halloween, commonly recognized as the eeriest time of the year, prompts early discussions on costumes, trick-or-treat, and, most essentially, candy. Beyond the fun and fright, Halloween has become a significant profit-generating venture in the retail sector.

2021 witnessed a considerable resurgence in Halloween sales as the world moved past the pandemic's threats and kindled their long-awaited festivities. Halloween expenditure exceeded the pre-pandemic benchmark, promising a new record high for 2023.

According to the National Retail Federation, Halloween spending could reach approximately $12.2 billion this year, translating to an average of $108.24 per person. This figure is measurably higher than last year's record-setting $10.6 billion or $102.74 per capita.

Research highlights an enhanced interest in Halloween-centric events, with 73% of people indicating plans for celebration, a rise from last year's 69%. Within this group, 68% plan to distribute candies, driving the overall candy expenditure predictions to a staggering $3.6 billion.

However, the Halloween spirit might face a chilling blow this year. Escalated candy costs could potentially burn severe holes in buyers' pockets. The latest Consumer Price Index report unveils candy prices to increase 7.5% year-over-year in September. Inflationary trends have cast shadows on almost every commodity this year, but high candy costs call for heavier blame.

Increasing candy costs are primarily attributed to the global sugar shortfall. Global sugar supply is expected to decline by 10% to 15%, steered by harsh weather conditions. Additionally, soaring cocoa prices, fueled by supply chain hurdles and persisting droughts, present a disheartening picture for ardent chocolate lovers.

Researchers at the sales and marketing group Advantage Solutions surveyed over 1,000 adults. About 40% of those surveyed said inflation will impact their plans to buy candy. However, despite rising costs, many people would be unwilling to hold back on celebrations, as evident from the projected Halloween spending, benefiting the candy companies.

A recent survey conducted by Advantage Solutions amongst a sample of over 1,000 adults revealed that approximately 40% of respondents anticipate a considerable inflationary impact on their candy purchases. Yet, the spirit of Halloween appears indomitable, as consumers are seemingly unwilling to dampen their celebrations, resonating with the foreseen spending predictions. Candy companies would benefit by passing the increased prices to the customers.

Given the landscape of mushrooming Halloween spending in the U.S. and globally, let’s look at some candy stocks: Nestlé S.A. (NSRGY), The Hershey Company (HSY), Tootsie Roll Industries, Inc. (TR), and Rocky Mountain Chocolate Factory, Inc. (RMCF), well-positioned to thrive in the foreseeable future.

Nestlé S.A. (NSRGY)

Based in Vevey, Switzerland, NSRGY, with a staggering market cap surpassing $306 billion, reports its recent majority stake acquisition of Brazilian luxury chocolate manufacturer Grupo CRM. The move was made last month as a strategic step to broaden NSRGY’s portfolio within the premium chocolate niche. Its offering is currently sparse in this sector, apart from the Italian brand Baci.

Initially, the acquisition raised eyebrows due to NSRGY’s concentration on the coffee, pet care, and nutrition sectors, but on further examination, the action holds a clear rationale. NSRGY runs a chocolate enterprise in Brazil, and thus, the amalgamation of production channels could lead to valuable synergies. Additionally, success within the premium chocolate category has been seminal in brands like Lindt.

Over the past five years, its net income and EPS grew at CAGRs of 3.7% and 6.5%, respectively. Its trailing-12-month ROCE, ROTC, and ROTA of 24.01%, 10.18, and 7.35 are 105.5%, 54.8%, and 53.4% higher than the industry average of 11.68%, 6.58%, and 4.79%, respectively.

Net financial debt swelled by 14.7% year-over-year to CHF 55.61 billion ($61.53 billion) for the first half of 2023 (January 2023 - June 2023), while its free cash flow stood at CHF 3.42 billion ($3.79 billion). The increase in debt primarily reflects the dividend payment of CHF 7.8 billion ($8.63 billion) and share buybacks of CHF 2.6 billion ($2.88 billion).

For the fiscal third quarter ending September 2023, analysts expect NSRGY’s revenue to increase 8% year-over-year to $25.33 billion. For the fiscal year ending December 2023, its revenue and EPS are expected to surge 2.8% and 7.6% year-over-year to $104.83 billion and $5.58, respectively.

Rising sugar and cocoa prices may impose increased production costs on NSRGY. The firm has implemented measures to alleviate the expenses by adjusting its product prices.

The company's key strategy pertains to establishing a sustainable supply chain for cocoa to preserve the stability of its supply. For instance, it aims to source 100% of its cocoa through the Nestle Cocoa Plan by 2025. This addresses short-term cost concerns and guarantees the long-term sustainability of their raw materials.

The Hershey Company (HSY)

Chocolate bar and candy-making giant HSY, boasting a market cap of over $38 billion, underscores its global domination by enhancing a rich diversity of universally acclaimed brands. Excelling in the constantly evolving sugar confectionery arena, HSY’s strategically alluring product category capitalizes on the easy accessibility, cost-effectiveness, and irresistible indulgence associated with confectionery treats.

HSY fortifies its influential brand presence through a calculated blend of inventive developments and strategic business acquisitions. This proactive approach targets a heightened adaptation to ever-emerging consumer demands and trends, catering to domestic and international markets.

In this regard, Hershey Canada recently marked a significant milestone, heralding the debut of HERSHEY'S OAT MADE, an innovative plant-based chocolate. This enticing and wholesome option responsibly addresses the escalating interest in plant-based dietary alternatives, bolstering the likelihood of Hershey Canada’s revenue surge and augmenting HSY’s overall business performance.

Over the past three and five years, its net income grew at 18.6% and 11.7% CAGRs, while revenue grew at 10.7% and 7.1% CAGRs over the same periods.

HSY has consistently outperformed expectations in terms of top and bottom-line quarterly returns. Considering the approaching holiday season, commencing from Halloween, HSY could achieve its guidance for the second half of 2023.

For the fiscal third quarter ending September 2023, analysts expect HSY’s revenue and EPS to increase 8.5% and 13.2% year-over-year to $2.96 billion and $2.46, respectively.

In addition, institutional investment decisions tend to wield a profound influence, particularly amongst individual investors. Several institutions have modified their HSY stock holdings. Institutions own the lion's share in HSY, with roughly 78.3% ownership. Of the 1,410 institutional holders, 573 have increased their positions in the stock. Moreover, 87 institutions have taken new positions (2,337,118 shares).

Tootsie Roll Industries, Inc. (TR)

TR, a producer and distributor of confectionery products in the United States, Canada, Mexico, and internationally, has demonstrated significant strides in augmenting company efficiencies, as evidenced by its Return on Total Capital (ROTC) of 7.95%, which is 20.8% higher than the industry average of 6.58% and about a 23% higher than its five-year average of 6.47%.

In the second quarter and first half of 2023, TR witnessed substantial sales growth credited to robust sales strategies and targeted marketing programs, primarily seasonal sales programs. While increased sales prices contributed to this improvement, heightened sales volumes also played a part.

However, a survey by Shiny Smiles Veneers on August 25, 2023, collated responses from 1,002 Americans on their Halloween candy preferences, which may pose challenges for the sweet confectioner. The study revealed that 13.8% of respondents would prefer not to receive Tootsie Roll, 13.9% Nik-n-Lip, and 10.9% Double Bubble. This consumer sentiment could potentially impact TR’s future sales.

Despite making strides toward margin restoration, TR is yet to attain its historical levels. It projects increased ingredient costs in 2024 compared to 2023. Given escalating input costs and the economy's high inflation rate, there would be challenges to achieving the former profit margins anytime soon. TR remains vigilant in managing the mounting costs and further industry price increments, considering the implications and limitations of transferring such costs to its customer base.

Another concern is labor challenges encountered within several of TR's manufacturing facilities, which could jeopardize the company's supply chain efficiency.

On a positive note, TR pays its shareholders a $0.36 per share dividend annually, translating to a 1.16% yield on the current share price. Its four-year dividend yield is 1.03%. The company’s dividend payouts have grown at CAGRs of 2.5% and 2.7% over the past three and five years, respectively.

TR’s five-year average Return on Common Equity (ROCE) was 8.61%, and the five-year average dividend yield stood at 1.05%, so the promising fundamentals may not have yet captured investors' attention. Investors could delve deeper into this stock as additional factors may transform it into a long-term growth prospect.

Rocky Mountain Chocolate Factory, Inc. (RMCF)

International premium confectionary and chocolate franchisor and producer RMCF announced the addition of a franchisee from Missouri Western State University’s respected Center for Franchise Development.

The firm's persistent and assertive adherence to its Strategic Transformation Plan aims to cement RMCF as America's top premium chocolate provider. CEO Rob Sarlls expressed optimism about the company’s prospects, suggesting the initiatives implemented this year would boost revenue in the coming quarters, coinciding with the festive season.

Operational changes have begun showing a positive impact. While reducing its driver fleet by 33%, RMCF has maintained consistent pound volume shipping from its Durango facility, thanks to its logistic optimization.

Furthermore, RMCF has restructured its franchisee royalty and introduced a volume-based discount program. These strategies could encourage high-performing franchisees to expand to multiple locations. RMCF has also tackled issues impeding its e-commerce activity, now outsourcing to reliable third-party services for order fulfillment.

For the fiscal second quarter that ended August 31, 2023, RMCF’s total revenues stood at $6.56 million, consistent with the prior-year quarter. Retail sales and royalties contributed to these steady results. Its net loss from continuing operations was $999 thousand, a significant decline from the previous year's loss of $3.15 million. As of August 31, 2023, its current assets stood at $10.10 million.

Furthermore, RMCF participated in its inaugural investor conference in almost a decade to foster increased transparency and engagement with shareholders and potential investors. This move signifies a renewed commitment to investor relations under new leadership while providing a platform to detail the company’s future strategies.

Is Exxon Mobil (XOM) Gearing up to Become the #1 Energy Stock?

Posted on by The INO.com Team

 

The American shale industry is a testament to the inventive spirit of grassroots capitalist enterprise. This sector was revolutionized by innovative frackers, who introduced groundbreaking methods of horizontal drilling and oil extraction from rock formations.

Pioneer Natural Resources, an industry-leading shale specialist, significantly contributed to this upsurge by boosting domestic oil production from 8 million barrels per day in 2005 to 15 mbpd in 2015, transitioning America from a net oil importer to an exporter.

However, not all major oil companies rushed to capitalize on the shale boom with the same zeal. Global oil giant Exxon Mobil Corporation (XOM) cautiously approached the rich shale territory, such as the Permian basin, due to the reckless expansionism of the wildcatters, consequently burning billions of investors' funds.

However, intentions regarding shale developments from the oil titan have shifted recently. In June, Darren Woods, CEO of Exxon Mobil, announced plans to double the company's shale oil production within a five-year timespan, a goal anticipated to materialize sooner.

On October 11, XOM unveiled its proposed $59.5 billion acquisition of Pioneer Natural Resources, representing one of the most substantial mergers ever seen in the oil industry. A successful merger would boost XOM’s domestic oil production to nearly double overnight, propelling it to the top among American producers. Furthermore, it could catalyze additional consolidation in this still-disjointed industry, potentially establishing American shale producers as the driving force of the global oil market.

But Why Shale?

The Permian Basin, between Texas and New Mexico, is an optimal opportunity for producers aiming to bolster their supply. According to the Federal Reserve Bank of Dallas, the Permian Basin provides about 40% of American oil production and 15% of its natural gas.

The renowned shale deposit boasts substantial infrastructure, is recognized for its high-yield productivity, and possesses significant untapped reserves that add to its appeal in the industry.

The shale industry has gradually transformed into a highly profitable venture in recent years. Enhancements in operational efficiency and a relentless focus on cost curtailment have eliminated wasteful methodologies.

According to JPMorgan Chase, the return on expenditures of American exploration and production, primarily shale-based, effectively produces double the oil volume it did in 2014. The sector’s enterprises have started producing methane, a potent greenhouse gas typically produced in tandem with shale oil.

This strategic shift first came due to regulatory enforcement and was later propelled by the commercial rationale as methane is a component of natural gas. Thus, its salvage not only makes environmental sense but also enhances profitability. Moreover, American shale's development process has proven to be faster, more affordable, and less carbon-intensive than conventional fields.

Major fracking companies have exhibited responsiveness to Wall Street’s appeals for enhanced returns over shale production hikes. The latest fiscal prudence endured during the oil price spike following Russia’s Ukraine invasion in February 2022.

The Acquisition and Its Impact

According to RBC Capital Markets analysts, Pioneer, the Permian oilfield's primary well operator, accounts for 9% of gross production, while XOM ranks fifth with 6%. Pioneer expanded its portfolio through significant acquisitions, such as shale rivals DoublePoint Energy for $6.4 billion in 2021 and Parsley Energy for $7.6 billion in 2020 under CEO Sheffield.

XOM's all-stock acquisition of Pioneer at $253 per share would catapult it to the top position in the largest U.S. oilfield, ensuring a decade of low-cost production. The merger marks XOM's most substantial acquisition since the $81 billion Mobil Oil procurement in 1999.

As of June 30, 2023, XOM maintained a robust cash reserve of approximately $30 billion. The company's decision to proceed with an all-stock deal offers a strategic advantage, significantly alleviating the potential fiscal pressure associated with debt-financed acquisitions. Moreover, when evaluated against its industry peers, XOM's balanced market valuation underscores the strategic prudence of an all-stock purchase.

The merger consolidates Pioneer’s 850,000 net acres in the Midland Basin with XOM’s 570,000 net acres across the Delaware and Midland Basins, creating an unprecedented high-quality undeveloped inventory posture in the U.S. unconventional industry.

The companies will have an estimated 16 billion barrels of oil equivalent resource in the Permian. Once the deal materializes, XOM’s Permian production volume is expected to more than double to 1.3 moebd, based on 2023 estimates and surge to about two moebd in 2027. The strategy involves increasing the output per well by fusing XOM’s technology with Pioneer's cost-effective production methods, which average approximately $10.50 per barrel.

XOM has a strategy of investing to raise production if the oil price and forecast profits are high enough. Rystad’s Alexandre Ramos-Peon, head of shale well research, anticipates the Permian Basin has another 15 to 20 years of high-quality drilling – which could convince XOM to ramp up output.

As XOM asserts, this transaction presents an opportunity for enhanced U.S. energy security by applying top technologies, operational excellence, and financial capability to a crucial domestic supply source and benefitting the American economy and its consumer base.

The deal, slated to close in 2024, would result in four of the largest U.S. oil firms dominating the Permian Basin shale field and its vast infrastructure. The size of this acquisition surpasses Shell's $53 billion BG Group acquisition in 2016, which positioned Shell at the forefront of the global LNG market.

Upon finalizing the sale, CEO Sheffield would receive a $29-million exit package while the other four top Pioneer executives will collectively earn about $42 million in severance payment. Pioneer shareholders will receive 2.3234 shares of XOM for each Pioneer share held.

Let's briefly delve into the key takeaways for investors from this potential acquisition:

Over the past two years, XOM has effectively transformed its financial stability, managing to rise from a period of significant losses and staggering debt. The recovery was accomplished by implementing cost reduction measures, asset liquidation, and capitalizing on escalating energy prices driven by global geopolitical turmoil.

Moreover, XOM's investments in renewable energy and strides toward environmental responsibility have yielded tangible results, evidenced by the record profit of $56 billion achieved two years after a deficit of around $22 billion precipitated by the COVID-19 pandemic.

Given its revitalized financial situation and solid operational foundations, XOM presents an enticing prospect for institutional investors. Notably, several institutions have recently modified their XOM stock holdings. Institutions hold roughly 60.5% of XOM shares. Of the 3,612 institutional holders, 1,564 have increased their positions in the stock. Moreover, 134 institutions have taken new positions (8,794,955 shares).

The oil giant's share price has recovered strongly since its early 2020 slump with plummeting oil and gas prices. It is trading at a surplus to the sector's earnings. Its forward non-GAAP P/E of 11.39x is 9.5% higher than the industry average of 10.40x. However, its forward EV/Sales multiple of 1.24 is 41.8% lower than the industry average of 2.15.

XOM fell short of market expectations and experienced challenges in financial performance in the last reported quarter. However, it remains resilient and focused on strategic initiatives to drive long-term growth and value creation.

Despite experiencing a dip from its record high of $120 following merger news, XOM’s shares now trade below their 100-day and 200-day moving averages of $108.53 and $109.83, respectively, showcasing a downtrend. However, Wall Street analysts expect the stock to reach $126.06 in the next 12 months, indicating a potential upside of 18.4%. The price target ranges from a low of $105 to a high of $150.

XOM anticipates higher crude oil prices to boost its upstream earnings by $900 million to $1.3 billion and higher natural gas prices to supplement $200 million to $600 million to its profits in the third quarter of 2023. This could enable the oil giant to report impressive results for the period, indicating its operating profits for the quarter to lie between $8.3 billion and $11.4 billion.

For the fiscal third quarter of 2023, analysts expect its revenue and EPS to come at $90.03 billion and $2.32, respectively. XOM topped consensus EPS estimates in three of the trailing four quarters.

Bottom Line

The announcement of the merger did not astonish many in the market. However, the essential query that lies ahead is the impact this deal will have on energy markets and whether it will serve as a profitable venture for XOM in the long haul.

Considering XOM's sluggish price trends and mixed analyst predictions and valuation, it could be wise to wait for a better entry point in the stock.

Natural Gas Surge Sparks Investment Potential: 4 Stocks to Consider

Posted on by The INO.com Team

Natural gas prices are making a solid comeback after deferring to oil throughout the year. Industry experts speculate that shares of gas production companies may soon outshine those of their oil-focused counterparts.

After surging to almost $100/barrel on September 27, global crude prices have suffered a hard fall due to dwindling global demand. Efforts to stimulate price growth through supply cuts are proving ineffective.

The Chinese economy, undergoing a challenging period, weighs on the country's energy consumption. China now relies on record inventory levels accumulated earlier this year as refiners reduce their purchases following the oil price escalation to over $80/barrel.

Europe's economy is also under strain since Russia's invasion of Ukraine disrupted European energy supplies. Meanwhile, U.S. domestic producers have boosted production, anticipated to reach 12.8 million barrels daily this year. Domestic oil demand in the U.S. has decreased due to reduced driving habits, further pushing down oil prices.

Natural gas futures have remained exceptionally volatile due to ongoing worries surrounding supply and demand factors. Prices tipped over $3 following a lower-than-projected inventory build-up.

Let’s see what’s favoring the natural gas price rise…

Favorable Demand

Increased demand during the sweltering summer months resulted in higher usage of air conditioning systems, leading to more electricity production powered by natural gas.

The anticipated colder winter seasons due to the El Niño weather pattern should necessitate additional heating, triggering more demand for natural gas.

Additionally, following the trade deal between Mexico and the U.S., the rising demand for gas from Mexico should further boost the natural gas industry.

Constrained Supply

Despite an initial surplus of natural gas at the beginning of the year, U.S. producers have significantly reduced operations due to declining prices. The number of natural gas rigs in operation has dropped by over 20% since May – a factor likely to provoke increased growth for natural gas futures.

Against this backdrop, let’s understand why industry players Hess Corporation (HES), APA Corporation (APA),  California Resources Corporation (CRC), and Obsidian Energy Ltd. (OBE) could be considered.

Hess Corporation (HES)

With a market cap exceeding $47 billion, HES, a prominent natural gas provider to the United States, Guyana, Peninsular Malaysia and Thailand, could experience growth in revenue and profitability amid rising natural gas prices.

The prevailing oil price scenario, highly encouraging and anticipated to persist, is expected to foster an advantageous business climate for HES’ exploration and production activities, particularly in the Gulf of Mexico and offshore Guyana.

HES possesses a notable reserve of premium drilling sites within the Bakken shale play. With a planned four-rig drilling initiative within this area, HES forecasts bringing 110 new wells in 2023, strengthening its production outlook and further accelerating profitability.

Remarkable oil discoveries in the Stabroek Block, situated offshore Guyana, contribute to over 11 billion barrels of oil equivalent (boe) in gross recoverable resources. High natural gas prices could elevate the value and return of these ventures, fostering increased interest in investment and partnership possibilities.

HES anticipates oil production from the country’s impending three production vessels to surpass its estimated capacities. By 2027, the corporation will operate six FPSOs, generating a combined gross output capacity exceeding 1.2 million barrels daily.

The Free Cash Flow (FCF) growth is anticipated to diminish the debt load and execute capital return to shareholders in the coming years. Assuming a crude oil price of $75 per barrel, the company mooted a 25% annual cash flow increase over the next five years.

Moreover, HES plans to allocate 75% of its annual FCF to shareholders through dividend enhancements and share buybacks, demonstrating unwavering commitment to maximize value and capital returns to its shareholders.

Despite the recent downturn in HES’ share price, a more detailed examination of the company's production strategies suggests latent potential for sustained long-term growth.

Wall Street analysts expect the stock to reach $175.25 in the next 12 months, indicating a potential upside of 14.1%. The price target ranges from a low of $150 to a high of $210.

APA Corporation (APA)

Boasting a market cap of over $11 billion, APA, a leading oil and gas producer in the U.S. and abroad, maintains a diversified portfolio of assets and operations.

APA's considerable production volume is attributed to increased drilling activity, higher completion rates, and enhanced well performance. Moreover, the firm has reaped the advantages of escalated oil and gas market prices, fostering an expectation that elevated natural gas prices could amplify its revenue and cash flow from natural gas production and sales and could strengthen APA’s balance sheet and financial flexibility.

APA forecasts its third-quarter total adjusted production and adjusted oil production to fall on the higher end of its guidance range. It projects adjusted production between 337 Mboe/day and 339 Mboe/d and adjusted oil production between 159 Mboe/day and 161 Mboe/d.

The optimism owes to the high-performing assets in the Permian oil region and the U.K. North Sea, which have consistently proven their value by contributing to the company's total production capacity.

In addition to output, APA's fiscal stability is dictated by pricing strategy. Within the U.S., the company predicts third-quarter realized prices of $82 per barrel for oil, $21.50 per barrel for natural gas liquids, and $2.00 per Mcf for natural gas. This reflects APA’s judicious market analysis and pricing aptness.

Internationally, the firm anticipates realized prices to stand at $88 per barrel for oil, $50 per barrel for NGL, and $4.25 per Mcf for natural gas - indicative of APA’s proficiency in adjusting to disparate market climates.

The company aims to return at least 60% of FCF to shareholders through a competitive base dividend and share repurchases. It pays an annual dividend of $1.00 per share, translating to a 2.57% yield on the current share price. Its four-year average dividend yield is 2.54%. The company’s dividend payouts have grown at a CAGR of 22.1% over the past three years.

California Resources Corporation (CRC)

California, one of the world’s top oil and natural gas hubs and the United States’ seventh most prolific oil producer in 2022, may seem an odd location for investing in an oil and gas company, considering the state's stringent emissions regulations.

Yet, CRC, an oil and natural gas firm in Long Beach, counters this perspective. CRC operates 50 fields in the Sacramento Basin, consisting of dry gas production, which provides a significant portion of the natural gas supply to the San Francisco Bay Area.

Over the past six months, CRC’s stock price increased over 38% and is currently trading at a premium to the sector based on earnings. Wall Street analysts expect the stock to reach $65.40 in the next 12 months, indicating a potential upside of 21.2%. The price target ranges from a low of $60 to a high of $70.

Its forward non-GAAP P/E of 10.60x is 2.1% higher than the industry average of 10.39x. However, its forward EV/Sales multiple of 1.62 is 25.2% lower than the industry average of 2.17.

In line with the environmental responsibility, CRC has embarked on a collaborative joint effort to promote carbon capture and storage projects. This bears testament to the company's commitment to cleaner and greener energy alternatives. The distinguishing feature of CRC remains its substantial investments in renewables alongside a beneficial exposure to its oil and gas asset base, resulting in consistent FCF growth over the long term.

The impact of oil and gas price surges is predicted to be reflected in CRC’s third quarterly report, augmenting its earnings and FCF. Analysts expect its revenue and EPS in the fiscal third quarter of 2023 to come at $498.76 million and $0.97, respectively. CRC topped consensus revenue estimates in each of the trailing four quarters.

Furthermore, CRC attempts to share its success with its shareholders, paying an annual dividend of $1.13 per share, which translates to a 2.10% yield on the current share price. Its four-year average dividend yield is 0.94%. CRC has also been buying back shares at a good rate for the last few years.

Obsidian Energy Ltd. (OBE)

Calgary-based Canadian oil and natural gas company OBE, which specializes in exploring, developing, and producing petroleum resources primarily in the Western Canada Sedimentary Basin, has recently revealed a progressive three-year plan.

The plan forecasts a significant production upsurge that should reach 50,000 barrels of oil equivalent per day by mid-2026. The rise in production is expected to be predominantly driven by the enhancement of OBE’s Peace River properties, with a projected increase from 6,600 boe/d to 24,000 boe/d.

Assuming successful implementation of the plan, an estimated $291 million of cumulative FCF could be generated over this period, based on a $75/bbl WTI oil price and a forecasted 2026 funds from operations (FFO) of $8.19 per share.

Capital expenditures for 2024, 2025, and 2026 have been outlined at $380 million, $445 million, and $420 million, respectively, expected to generate an FCF of $53 million, $36 million, and $213 million yearly. The surplus FCF could create further shareholder value, encompassing return on capital, additional growth, and embarking on potential acquisition opportunities.

OBE is in a favorable position as most of its revenues are in U.S. dollars. This allows the company to benefit from the favorable exchange rate between the Canadian and U.S. dollar.

In terms of production, OBE projects an output between 31,500 boe/day and 32,500 boe/day for the fiscal year of 2023. Street expects OBE’s revenue to reach $656.43 million for the same period and an FFO of $3.55.

Considering OBE’s multifarious performance, robust development strategy, and diversified asset portfolio, it has strong potential to be watched.

Earnings Season Preview: What Lies Ahead for Banking Stocks?

Posted on by The INO.com Team

Financial institutions offer various consumer financial services, encompassing current and savings accounts, online payment options, credit and debit card facilities, residential and commercial lending options, insurance coverages, and investment portfolio management. Robust consumer spending and business investment activities propel demand for these financial services.

The third-quarter earnings season will kick off with big banks this week. As banking and finance sector giants JPMorgan Chase & Co. (JPM), BlackRock, Inc. (BLK), WaFd, Inc (WAFD), and Unity Bancorp, Inc. (UNTY) prepare to release their results, we look at what analysts expect and what could shape their prospects.

Before delving into the financial prospects of these stocks, let’s discuss the factors influencing the industry’s trajectory.

The financial sector, particularly the banking segment, has demonstrated signs of stabilization following the turmoil induced by the collapse of the regional banks. The recovery coincides with the Federal Reserve's benchmark interest rate hikes to its peak in over two decades, aiming at alleviating inflationary pressures.

In September, record-breaking 334,000 nonfarm payroll additions surpassed economists' forecasts and brought increased potential for further rate increases. This comes as an overheated job market must be balanced by cooling inflation to achieve a desirable economic "soft landing." Higher interest rates could prove advantageous to banks, typically resulting in higher net interest income.

However, the market sentiments surrounding banking stocks have been negatively impacted by the downgrades and warnings issued by top rating agencies — Moody's and Fitch. These actions have gravely spotlighted investors' anxieties concerning the industry's stability and future. Similarly, S&P Global reduced its credit ratings and outlook for several U.S. regional banks, marked by their considerable commercial real estate (CRE) exposure.

This action could lead to increased borrowing costs for the banking sector, battling to recover from previous upheavals. Furthermore, with the Fed’s interest rate hikes raising borrowing costs, banks find themselves in a situation where they must offer higher interest on deposits to retain customers considering more lucrative alternatives.

In the forthcoming weeks, the financial sector, representing more than 40% of the S&P 500 members, is set to dominate market discourse, as it is slated to reveal third-quarter earnings. According to a Factset article, the sector is predicted to record the fourth-highest quarterly earnings growth rate at 8.7% among 11 sectors.

The banking industry is anticipated to report the third-highest annual earnings growth rate at 4%. Diversified Banks are expected to achieve an earnings growth of 7% on a sub-industry level, whereas Regional Banks may report a 15% decline in earnings. Within the Capital Markets industry, Asset Management and Custody Banks are projected to record earnings growth.

Let’s now comprehend some factors that could influence the featured stocks in the near term:

JPMorgan Chase & Co. (JPM)

JPM has proven its robustness and keen strategic foresight in the past few years, preparing tactically for a high-interest rate environment by stockpiling cash starting in 2021. Their fiscal prudency awarded them an advantageous position to acquire First Republic Bank under desirable terms following its seizure by federal regulators earlier this year.

The second quarter saw a surge in JPM's revenue and net income, boosted by higher interest rates and the well-timed acquisition of First Republic Bank. These successful endeavors are testaments to the bank's competent management and foresight.

Looking forward to the imminent week, JPM is expected to exceed expectations with its third-quarter earnings – a result of excellent performance across its primary business sectors.

According to data compiled by Bloomberg, the banking giant stands ready to record the fastest earnings-per-share growth compared to other major U.S. investment banks this reporting season.

The slump in trading revenues and investment banking fees was offset by the bank's net interest income increase of 27% during the quarter. According to Piper Sandler, despite persistently high interest rates, the bank might surpass its annual net interest income guidance.

For the fiscal third quarter ending September 2023, JPM’s revenue and EPS are expected to increase 20.2% and 24.8% year-over-year to $39.31 billion and $3.89, respectively.

Beyond these impressive forecasts, it is noteworthy that JPM surpassed consensus revenue and EPS estimates in each of the trailing four quarters.

BlackRock, Inc. (BLK)

BLK is recognized globally as a top-tier provider of investment, advisory, and risk management solutions, risks facing adversity due to escalating interest rates. An upward trajectory in interest rates stands to diminish the demand for bonds and fixed-income securities, which serve as substantial income generators for BLK.

As interest rates climb, bond prices take a downturn, prompting investors to explore other asset classes or seek out richer yields in alternative locations. This scenario can potentially depress the value of BLK’s assets under management (AUM) and any fees garnered from managing these assets.

Further concerning is that BLK leans heavily on debt to fuel its operations and fund acquisitions. As of June 30, 2023, the firm registered $7.96 billion in total long-term borrowings. For the six months that ended June 30, 2023, BLK paid approximately $89 million in interest on long-term notes.

The firm's EPS is projected to take an 11.5% year-over-year plunge to $8.45 for the fiscal third quarter ending September 2023 as it grapples with decelerating institutional flows and the impacts of foreign-currency headwinds.

On a brighter note, the company’s revenue for the same quarter is forecasted to increase 5.6% year-over-year to $4.55 billion. The company topped consensus EPS estimates in the trailing four quarters and consensus revenue estimates in three of the trailing four quarters.

WaFd, Inc (WAFD)

Regional bank WAFD offers various financial products and services, encompassing current and savings accounts, mortgages, loans, and investments.

A potential rise in interest rates could boost the bank’s net interest income, as evidenced by its third-quarter net interest income results that reached $168.70 million, marking an 11.2% year-on-year increase.

Over the past three years, the bank has achieved impressive growth, with EPS escalating by 18.3% CAGR. If WAFD maintains this trajectory, shareholders should be thoroughly satisfied.

Furthermore, over the past three years, the company's revenue and net interest income expanded at CAGRs of 9% and 13.8%, respectively, highlighting the solid caliber of WAFD’s growth.

One point of concern lies in the bank's substantial reliance on debt. For the last reported quarter that ended June 30, 2023, WAFD reported borrowings of $3.60 billion at an interest rate of 3.76%.

Moreover, for the fiscal fourth quarter ending September 2023, WAFD’s revenue is anticipated to decline 4.3% year-on-year to $180 million, while EPS is expected to decline 16.2% year-over-year to $0.90.

Unity Bancorp, Inc. (UNTY)

UNTY, a community-oriented bank in Clinton, New Jersey, is well-positioned to capitalize on its robust fundamentals, solid loan and deposit balances, and diverse fee-income sources.

It is a conservatively managed organization that has constantly been acknowledged as a top-tier community bank. Although not exempt from the challenges faced by the broader banking sector, UNTY seems well-prepared to confront these difficulties while retaining the confidence and favor of the communities it serves.

The bank's revenue and net interest income expanded at CAGRs of 14.8% and 17%, respectively, over the past three years, justifying its strong growth trajectory.

UNTY's main earnings source, net interest income, decreased marginally sequentially by $0.4 million to $23.5 million. The decline was due to the cost of interest-bearing liabilities rising faster than the yield of interest-earning assets, causing a slight decrease in net interest margin to 4.04%.

Mixed analyst estimates about the company’s potential are evident as UNTY’s EPS is expected to decline 4.3% year-on-year to $0.89, while its revenue is expected to increase 1.2% year-over-year to $25.15 million for the fiscal third quarter ending September 2023. Moreover, the stock has topped the consensus EPS and revenue estimates in three of the trailing four quarters.

Furthermore, UNTY experiences rapid growth and has strategically chosen to pay out a minimal fraction of its earnings as dividends to shareholders, opting instead to reinvest back into the business. This approach promises to generate significant value for investors over time. Over the past three and five years, UNTY's EPS has grown at CAGRs of 22.4% and 19.2%, while dividend payouts grew at 13.7% and 12.6% over the same periods.

Record Chicken Prices and Factory Disruptions – What's Next for Tyson Foods (TSN) Stock?

Posted on by The INO.com Team

Since the COVID-19 pandemic, Arkansas-based protein-focused food company Tyson Foods, Inc. (TSN) has faced difficulties, grappling with record-high cattle costs and elevated animal feed prices.

U.S. consumers are struggling with unprecedentedly high chicken prices at their local supermarkets, a trend expected to persist as TSN and its competitors scale back poultry production to improve profitability. Last year, TSN shuttered its processing facility in Van Buren, Arkansas, resulting in nearly 1,000 job losses.

The firm's cost-cutting measures impacted even more workers this year with the announcement to close six domestic chicken plants, affecting approximately 4,700 employees. The scheduled closure dates for these facilities are projected between late 2023 and early 2024.

Also, due to cost-effectiveness, inflation-affected consumers opt for chicken over beef and pork. This change in consumer patterns keeps chicken prices high, with indications pointing toward a persistent upward trend.

According to data from the U.S. Department of Agriculture, the U.S. per capita chicken consumption is likely to surpass 100 pounds for the first time this year. Simultaneously, the nation's beef consumption is predicted to slump to its lowest since 2018, owing to escalating prices and declining cattle supplies. Similarly, decreased consumer spending has pushed pork consumption to its lowest since 2015.

Let’s now understand the probable implications of escalating chicken prices.

Bull Cases

The monthly U.S. Department of Agriculture data unveils that retail prices in August for whole fresh chickens and bone-in legs reached nominal records. Drumstick prices rose 10%.

Given the strong consumer demand for chicken, the price rise may be impacted further due to production cuts. Government data has indicated a 2.8% decrease in eggs placed in U.S. incubator facilities in the six weeks leading up to September 23, compared to the same period last year – a clear contrast to the 2022 trend, which saw a 3.6% uptick.

Furthermore, there has been an approximately 2.7% reduction in chicks allocated for meat production from the prior year, which had seen a bounce of 4.5%. This strategic cutback has positively influenced the chicken market. TSN could capitalize on the record-high prices by transferring the inflated costs onto consumers. In addition, with corn prices at a three-year low, reduced feed costs could improve margins for producers.

Simultaneously, companies have been reducing bird weight to restrict production and regain profitability. This strategy inevitably means less meat is available for consumers.

Experts predict that after two quarters of running at a loss, TSN's chicken division should see a return to profit by the end of the quarter ending September 30. The current tightening of supplies should boost producers' profit margins.

For the fiscal year ending September 2023, TSN’s revenue is expected to grow marginally year-over-year to $53.36 billion, while EPS is expected to come at $1.18.

Bear Cases

The inflation-hit consumers have been shifting their preferences toward more affordable food items. This could potentially diminish the demand for chicken products. Consequently, TSN, a company significantly dependent on poultry sales as its primary business, may experience a slump in sales and revenue.

Moreover, the highly pathogenic avian influenza or "bird flu" outbreak, which resulted in approximately 58 million bird deaths over the year, could further implicate the need for chicken among consumers, adding to the declining demand. Concerns regarding avian welfare and heightened precautionary measures could increase production costs for meat producers.

The soaring inflation has forced TSN to contend with increased feed, transport, and processing expenses. This surge threatens to erode the profit margins of the meat producer, thereby significantly challenging its ability to compete with other industry players.

The chicken plant closure is feared to have a ripple effect through the agricultural ecosystem, directly impacting nearly 29 local farmers supplying chicken and grain producers responsible for chicken feed in Dexter. The impending shutdowns could affect approximately 300 plant workers in North Little Rock and over 500 jobs in Corydon, Indiana. About 1,500 individuals employed at the Noel facility, Missouri, would be heavily impacted.

TSN had encountered difficulties in hatching birds and staffing processing lines amid an unexpected surge in demand for chicken post-pandemic. The company now grapples with surplus stock as poultry demand remains flat and wholesale prices have experienced a dip. TSN's attempt to increase production has been ill-advised.

TSN has announced a significant loss of $198 million for the nine months that ended July 1, 2023. This is reportedly the meat producer’s most substantial loss over a nine-month period since 2009. Its chicken division reported an operating loss of $503 million for the same period.

Bottom Line

TSN’s chicken business is responsible for one-fifth of the U.S. market supply. Coupled with the abovementioned factors, the company is experiencing heightened competitive pressure from plant-based meat substitute companies. These alternatives are trending among consumers who seek healthier and eco-friendly dietary options.

Adding to TSN's challenges, there is an ongoing investigation by the Department of Labor into allegations that migrant children were employed at its facilities. Should these accusations prove accurate, the company could face substantial legal jeopardy and potential damage to its reputation.

With TSN's weak financial health, there have been amplified concerns regarding its valuation. The stock currently trades at a forward non-GAAP P/E multiple of 40.05, 136.5% higher than the industry average of 16.45.

Considering these circumstances, investors could exercise caution when making a decision to invest in the stock.