We recently compiled a list of the 14 Best American Energy Stocks To Buy According to Analysts. In this article, we are going to take a look at where Ring Energy, Inc. (NYSE:REI) stands against the other American energy stocks.

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).

Ring Energy, Inc. (NYSE:REI)

Number of Hedge Fund Investors  in Q1 2024: 9

Average Analyst Share Price Target Upside: 57.89%

Average Analyst Share Price Target: $3

Ring Energy, Inc. (NYSE:REI) is a Texas based company with production assets in its home state and New Mexico. Like other small oil producers, key to its financial viability is the free cash flow. On this front, Ring Energy, Inc. (NYSE:REI) has been performing well and has grown its FCF by 52% on an absolute basis between 2020 and 2023. During its first quarter, the FCF stood at $15.6 million which marked a 48% annual growth, and also marked the 18th consecutive quarter of FCF positivity to indicate a ‘well oiled’ business. Ring Energy, Inc. (NYSE:REI) has also been using its growing FCF to reduce its leverage, and during Q1 it paid down $3 million in debt. Its long term debt grew by 44% to $417 million in 2023 as it expanded production in the lucrative Permian Basin by acquiring assets of another firm for an all cash acquisition of $75 million.

Ring Energy, Inc. (NYSE:REI) is already considering making further acquisitions in the future, with management sharing during the Q1 2024 earnings call:

“We’re predicting that we’re going to see additional assets become available in the Central Basin Platform, the southern part of the Northwest shelf as a result of some of these larger transactions we’ve seen close and/or that are pending. And so many of the operators that have been purchased operate out here and many of the operators that are doing the purchasing and acquiring also have assets out here that have not been their focus and fall in the category that we believe anyway in their halls would be considered non-strategic. So we anticipated them come into the marketplace for sale.

And we’re really excited about this area. We’ve done a lot of mapping. We’ve identified several opportunities out there that we would like. As you may recall, in the past, we have tried to negotiate transactions in the past. That’s how the Stronghold deal started but it ended up being a process that we ultimately prevailed in, Founders was a negotiated deal after a failed sale. And so we’re not opposed to doing that. We are constantly seeking to make acquisitions and that ranges everything from smaller bolt-ons that are just on the other side of the fence from us because it makes a lot of sense. We can continue to play that in the capital programs that we’re currently doing. But at the same time, there’s other areas out there that are very close to our operations that allow us to capture the synergies of our operating team and our expertise.

And so we believe that the pipeline is basically there for the next several years, probably more opportunities than we ourselves can take down. And so we’re excited about it. And so we’ll see how 2024 goes. I think one of the things that we have going for us right now is a little – what appears to be a little bit more stability in oil prices. So if you can stay between $75 and $85 for a sustained period of time, I think you’ll find more people willing to sell. And at the same time, increase the probability of a transaction, just simply because the expectations can – are closer – more closely aligned in a more stable oil price environment. So we’ll see how that goes. But anything from small bolt-ons to large acquisitions that could be as mean as a Stronghold deal and a Founders deal where that were – were for us in the past.”

Overall REI ranks 12th 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 Analysts to see the other American energy stocks that are on hedge funds’ radar. While we acknowledge the potential of REI 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 REI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.