Energy, primarily oil, drives the economy. This makes it one of the most important sectors for global and American economic prosperity. This importance has changed the US economic landscape quite a bit over the past couple of years. According to the Energy Information Administration (EIA), 2020 was a historic year for the US energy industry as it was the first time since 1949 that America became a net petroleum exporter. In 2020, the US imported 7.86 million barrels of oil per day, which was 640,000 barrels lower than its 8.50 million barrels per day of exports. Since then, US energy exports have continued to grow, and the oil surplus jumped to a record of 1.26 million barrels per day in 2022.
At the heart of this historic shift is the American energy industry which produced a historic 20.08 million barrels per day in 2022. This was nearly enough to theoretically meet America's oil consumption of 20.28 million barrels, but despite this, the US continued to import oil. On the surface, this sounds counterintuitive since a net energy exporter should be sufficient to meet all of its requirements through its own production. However, as America has historically depended on sour oil imports from the Middle East, US shale, which is sweet oil with low sulfur content, cannot be processed in similar volumes due to its different chemical characteristics.
Building on this, even though the US might be unable to use all the oil it produces, on the surface, it would also appear that fewer regulations on the oil industry and more drilling would be great for the sector. Well, the reality, as is in most cases, is slightly different. This is because low regulations lead to high drilling and end up benefiting firms with high production capacity in the short term. In the long term, as output rises and more companies invest in drilling, the price of oil falls. This appears to be great, after all, who doesn't like cheap gas prices? However, the US aims to have at least half of all new cars on the roads by 2030 be electric vehicles according to new rules by the Biden Administration. This goal will be fueled by initiatives such as the Inflation Reduction Act (IRA) which has earmarked $500 billion in spending and tax breaks for clean energy technologies and other areas.
So, if half of all new cars by 2030 are EVs and American oil producers end up expanding their production capacity to meet current demand, then they could end up sitting on excess capacity. Oil exploration is one of the most capital intensive industries in the world (upstream capital expenditure sat at $490 billion in 2022 according to the International Energy Forum) and recovering these costs requires steady demand. As a result, if regulations are strict, as opposed to lax, then oil producers will be forced to generate higher margins which carry the chance of improving production efficiency and lead to profit maximization that moves in line with the lower EV costs (and higher proliferation) of the future.
Shifting gears to focus on energy stocks, their performance depends quite a bit on energy prices. This was the case in 2022 when the Russian invasion of Ukraine disrupted the global energy supply chain and led to crude oil prices shooting to as high as $134 per barrel. During the same year, State Street's energy ETF shot up by 54% as oil companies all over benefited from record revenue and profits. However, the outlook for the energy industry in 2024 isn't as optimistic.
While the same ETF has gained 9.5% year to date, Brent crude opened 2024 at roughly $78 per barrel and is trading at $78.5 right now. For the second half of 2024, the EIA estimates that it will trade at $89 per barrel - higher than the first half average of $84. This is despite the fact that the world's largest oil user, China, is facing an uncertain economy that has led some to believe that its oil consumption could drop by 3.8% in the year's second half with diesel usage dropping by 5.6% annually. In fact, as FactSet notes, this "lower-than-forecast" global demand growth coupled with production increases might lead to an oversupplied oil market. If this is true, then the subsequent downward oil price adjustments could also lead oil stocks lower - and make current valuations overvalued.
Our Methodology
To make our list of the best American energy stocks to buy according to analysts, we ranked US based energy stocks with a market cap greater than $300 million by their average analyst share price target upside and picked out the stocks with the highest upside.
We also mentioned the number of hedge funds that had bought these stocks during the same filing period. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Aerial view of the vast landscape of Great Divide Basin, Wyoming.
Average Analyst Share Price Target Upside: 159.17%
Average Analyst Share Price Target: $3.11
Ur-Energy Inc. (NYSE:URG) is a uranium mining company with operations in Wyoming. This means that its performance is contingent on uranium reserves, annual production, and the general health of the uranium industry. The last bit is particularly important since Ur-Energy Inc. (NYSE:URG) relies primarily on selling uranium to generate sales. Its lead mining facility is Lost Creek, which has a life of ten years and the capability to produce 2.2 million pounds per year. Ur-Energy Inc. (NYSE:URG) also benefits from clean energy initiatives in the Inflation Reduction Act which seeks to maintain more than 90 nuclear reactors in America. Dril-Quip, Inc. (NYSE:DRQ) also benefits from the fact that it does not have to depend on uranium imports. Recent trends in geopolitics, spurred by the Russian invasion of Ukraine have led to sanctions against Russian Ukraine imports. This opens up a large market for Dril-Quip, Inc. (NYSE:DRQ), which might also benefit from a growing interest in nuclear power and government spending on clean energy.
Another key aspect of Ur-Energy Inc. (NYSE:URG)'s performance is off take agreements, which help ensure a stable demand for its products. Here's what management had to say on this front during the Q1 2024 earnings call:
"But the existing production in the near-erm production from our two flagship properties will come from Lost Creek, which is in production and Shirley Basin, which we’re entering construction now. So, starting with Lost Creek, it’s been in production now for over 10 years.
Overall URG ranks 3rd on our list of the best American energy stocks to buy according to analysts. You can visit 14 Best American Energy Stocks To Buy According to Analyststo see the other American energy stocks that are on hedge funds’ radar. While we acknowledge the potential of URG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than URG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
