“XLE” – the Energy Select Sector SPDR Fund is already up more than 20% for the year but energy stocks are not out of room to run just yet, says Al Rabil. He’s the Co-Founder and Chief Executive of Kayne Anderson Capital Advisors.
Rabil sees more upside in energy stocks
His bullish view is predicated, of course, on the “structural deficit” that was exacerbated in 2022 after Russia waged a war against Ukraine. On CNBC’s “The Exchange”, Rabil said:
I think we’re entering an energy super cycle. We’ve got a massive deficit of natural gas in Europe, and we’ve got inelastic demand on the oil side.
On top of that, demand for energy will climb even further once China comes back online.
Part of the reason why he’s constructive, though, is also that a GOP victory in the midterm elections could be a positive for the energy space and particularly for the pipeline companies. To that end, Rabil likes Targa Resources Corp (NYSE: TRGP).
Rabil’s bull case for Targa Resources
Just last week, this energy infrastructure company reported its third-quarter revenue that came in well below the Street expectations. Still, Rabil said:
I like Targa. It invested over $7.0 billion from 2017 to 2019. They’re investing about $1.0 billion to $1.5 billion a year now. So, they’re coming off of huge capex investments and they’re reaping the benefits of that in terms of free cash flow.
A near 2.0% dividend yield also makes it more exciting to own the stock that’s already up about 35% year-to-date. Targa is now calling for $2.85 billion to $2.95 billion in full-year adjusted EBITDA.
They just reported $768 million of EBITDA at $70 a share. Targa is looking at about eight times EBITA for 2023, which I consider a reasonable valuation.