Energy stocks Valero Energy Corporation (VLO), Unit Corporation (UNTC), PrimeEnergy Resources Corporation (PNRG), and MV Oil Trust (MVO) could be ideal investments to capitalize on steadily increasing demand for oil and gas from Asian economies amid constrained supplies due to turbulent geopolitics.
Before delving deeper into the fundamentals of each of these stocks to understand why they have plenty of upsides left, let's take a look at what's happening in the energy sector.
Energy prices climbed significantly in the first quarter of 2022, driven by solid demand and supply-side imbalances exacerbated by Russia’s invasion of Ukraine. However, the redrawing of the global energy map since the conflict began has been nothing short of a windfall for U.S. energy producers. The U.S. has “gone from (being) a very domestically focused market into an international powerhouse.”
Although oil and gas prices have retreated from their peaks due to macroeconomic uncertainties caused by inflation and high-interest rates, a reopening of China could create a multiplier effect that might take Brent crude to triple digits in the second half of this year, according to the forecast by Amrita Sen, founder, and director of Research at Energy Aspects.
In addition to growing Asian economies absorbing the bulk of the remaining available supplies, Europe’s increasing reliance on American shipments and Russia’s announcement of a voluntary production cut of 500,000 barrels a day in response to Western sanctions increase the likelihood of price increases.
Besides, energy demand is expected to grow in the long run due to increased economic activity and the effects of climate change. The global energy as a service market is projected to grow at a 10.3% CAGR to reach $144 billion by 2028.
Let’s take a closer look at the recommended stocks.
Valero Energy Corporation (VLO)
VLO is involved in manufacturing, marketing, and selling transportation fuels and petrochemical products in domestic and international markets. It operates in three segments: Refining; Renewable Diesel; and Ethanol. Its offerings include conventional, premium, and reformulated gasoline; California Air Resources Board (CARB) gasoline and diesel; and other refined petroleum products.
On January 31, VLO and Darling Ingredients Inc (DAR) announced their investment decision on a Sustainable Aviation Fuel (SAF) project at the DGD Port Arthur plant, which is owned and operated by Diamond Green Diesel Holdings LLC, a 50/50 joint venture between VLO and DAR.
With an estimated cost of $315 million, with half the amount attributable to VLO, the project is expected to be complete by 2035. Thereafter, the DGD Port Arthur plant will be able to upgrade approximately 50 percent of its current 470 million gallons annual production capacity to SAF, which is expected to make it one of the largest SAF manufacturers in the world.
Also, on January 31, VLO announced an increase in its quarterly cash dividend on common stock from $0.98 per share to $1.02 per share. The dividend is payable on March 16, 2023.
With this increase, the annualized cash dividend rate on VLO’s common stock has been raised to $4.08 per share. This translates to a yield of 2.98% at the current price. Over the past five years, the company has increased its dividend payouts at a 6.4% CAGR.
VLO’s revenues increased 16.3% year-over-year to $41.75 billion in the fiscal 2022 fourth quarter ended December 31, 2022. During the same period, the company’s operating income improved 169.4% year-over-year to $4.30 billion, while its adjusted net income amounted to $3.2 billion, up 223.9% year-over-year.
The company’s adjusted quarterly earnings per share came in at $8.45, registering an increase of 250.6% from the prior-year period.
VLO’s trailing 12-month return on common equity of 54.70% is 143.6% higher than the industry average of 22.46%. The company’s trailing 12-month return on total capital (ROTC) of 27.04% compares favorably with the industry average of 9.18%, while its trailing 12-month return on total assets (ROTA) of 18.90% also beats the industry average of 7.81%.
Analysts expect VLO’s revenue for the first quarter of fiscal 2023 to increase 2.3% year-over-year to $39.43 billion. For the same period, the company’s EPS is expected to increase by 190% year-over-year to $6.70. VLO has also impressed by topping the consensus estimates in each of the trailing four quarters.
The stock has gained 4.6% over the past month and 21.6% over the past six months to close the last trading session at $136.96. Despite the recent uptrend in its price, in terms of forward P/E, VLO is currently trading at 6.22x, 27.9% lower than the industry average of 8.63x.
VLO’s strong fundamentals have earned it an overall A rating, which translates to a Strong Buy in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
VLO also has an A grade for Momentum and a B for Growth, Value, and Quality. It is ranked #5 of 91 in the B-rated Energy – Oil & Gas industry.
Click here for additional POWR Ratings for Stability and Sentiment of VLO.
Unit Corporation (UNTC)
UNTC explores, acquires, develops, and operates oil and natural gas properties in the United States. The company operates through its three broad segments: Oil and Natural Gas; Contract Drilling; and Mid-Stream.
On January 31, UNTC paid its shareholders a special cash dividend of $10 per share. In addition, the company also announced a quarterly cash dividend policy, beginning in the second quarter of the fiscal, with an initial payout of $2.50 per share.
For the third quarter of the fiscal year 2022, which ended September 30, UNTC’s total revenues came in at $120.28 million, while its income from operations increased 39% year-over-year to $66.26 million. During the same period, the net income attributable to UNTC came in at $55.82 million or $5.60 per share, compared to $6.30 million and $0.55 per share in the prior-year quarter.
UNTC’s trailing 12-month ROCE, ROTC, and ROTA of 69.92%, 34.04%, and 36.09% compare favorably with the respective industry averages of 22.46%, 9.18%, and 7.81%.
The stock has dipped 4% over the past year to close the last trading session at $46.65. This is 2.83 times its trailing 12-month earnings, which is 64.6% lower than the industry average of 7.99x.
UNTC’s overall POWR Rating of A translates to a Strong Buy in our proprietary rating system. It also has an A grade for Momentum, Value, and Quality.
UNTC is ranked #6 of 91 stocks in the B-rated Energy - Oil & Gas industry. Click here for additional Growth, Stability, and Sentiment ratings for UNTC.
PrimeEnergy Resources Corporation (PNRG)
As an independent oil and gas company, PNRG acquires, develops, and produces oil and natural gas. The company also provides well-servicing support operations, site preparation, and construction services for oil and gas drilling and reworking operations for its own operations and as a contractor to third parties as well.
During the third quarter of the fiscal, which ended September 30, 2022, PNRG’s revenues increased 129.1% year-over-year to $39.65 million. During the same period, the company’s net income came in at $13.15 million or $4.88 per share, compared to a loss of $1.16 million or $0.58 per share in the previous-year quarter.
PNRG’s total assets stood at $212.90 million as of September 30, 2022, compared to $210.91 million as of December 31, 2021.
PNRG’s trailing 12-month ROCE, ROTC, and ROTA of 38.28%, 19.85%, and 19.91% compare favorably with the respective industry averages of 22.46%, 9.18%, and 7.81%.
PNRG’s stock has gained 13.6% over the past year to close the last trading session at $90.30. This is 7.01 times its trailing 12-month earnings, which is still 12.3% lower than the industry average of 7.99x.
PNRG’s POWR Ratings reflect its promising outlook. The company has an overall rating of A, which translates to Strong Buy in our proprietary rating system. It also has an A grade for Quality and a B for Growth and Sentiment.
Unsurprisingly, PNRG has been ranked #1 in the Energy – Oil & Gas industry.
Click here for additional POWR Ratings for Value, Momentum, and Stability for PNRG.
MV Oil Trust (MVO)
MVO is a statutory trust that acquires and holds net profits interests in the oil and natural gas properties of MV Partners, LLC, located in the Mid-Continent region in Kansas and Colorado.
On January 25, MVO distributed net profits of $4.72 million or $0.41 per unit for the quarterly payment period ended December 31, 2022, while withholding $263.54 thousand, from the proceeds otherwise available for distribution, as a reserve for the payment of future known, anticipated or contingent expenses or liabilities.
MVO distributes $1.64 per unit annually. This translates to a yield of 13.17% at the current price, comparable to the 4-year average dividend yield of 15.30%. Its dividend payouts have grown at a 22% CAGR over the past five years.
MVO’s distributable income increased 133.3% year-over-year to $8.05 million for the quarter ended September 30, 2022. Its income from net profit interest rose 136% from the prior-year quarter to $8.67 million. Distributions per trust unit rose 133.3% year-over-year to $0.70 during the same period.
MVO’s trailing 12-month ROCE, ROTC, and ROTA of 281.66%, 176.03%, and 304.43% are remarkably higher than the respective industry averages of 22.46%, 9.18%, and 7.81%.
The stock has gained 2.1% over the past six months to close the last trading session at $12.45. This is 6.55 times its trailing 12-month earnings, 18% lower than the industry average of 7.99x.
MVO has an overall B rating, equating to a Buy in our POWR Ratings system. It has an A grade for Momentum and B for Growth and Quality.
MVO is ranked #18 in the same industry. Click here for additional POWR Ratings for MVO’s Value, Stability, and Sentiment.
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VLO shares were trading at $137.22 per share on Wednesday morning, up $0.26 (+0.19%). Year-to-date, VLO has gained 8.96%, versus a 4.11% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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