Increased global demand for oil, driven by the reopening of the Chinese economy, could propel oil and gas prices globally this year. Additionally, the geopolitical turbulence causing supply constraints could push the prices up. Given this backdrop, let us now probe into energy stocks Marathon Petroleum Corporation (MPC) and Valero Energy Corporation (VLO).
The overall economy was hampered by macroeconomic headwinds and geopolitical turmoil. But conversely, the energy sector performed comparatively well. Over the past year, the Energy Select Sector SPDR Fund (XLE) has gained 4.1%, while the broader SPDR S&P 500 ETF Trust (SPY) plummeted 11.3% over the same period.
Several oil companies have reported the largest annual profits for 2022. This surge has been attributed to a “windfall of the war.” Moreover, although profits are expected to be lower this year, they are anticipated to be still higher than in the past two decades.
The International Energy Agency (IEA), in its Oil Market Report for March 2023, anticipates the world oil demand growth to accelerate over the course of 2023 and reach 102 million barrels per day (bpd), citing China’s economic reboot and rebounding air travels.
In addition, the IEA, anticipating a supply deficit in the latter part of the year, commented, “Building stocks today will ease tensions as the market swings into deficit during the second half of the year when China is expected to drive world oil demand to record levels.”
Moreover, Russia’s decision to continue a 500,000 bpd oil production cut until the end of June and record-high U.S. oil exports to Europe will likely keep the prices up.
Therefore, fundamentally strong oil and gas stocks MPC and VLO could be wise portfolio additions now to capitalize on the present oil market dynamics.
Marathon Petroleum Corporation (MPC)
MPC operates as an integrated downstream energy company in the United States. The company operates through two segments: Refining & Marketing; and Midstream.
On March 8, MPC announced the acquisition of a 49.9% interest in LF Bioenergy, an emerging Renewable Natural Gas (RNG) producer in the United States, from Cresta Fund Management for $50 million. This acquisition might create an opportunity for further integration and advance MPC’s goal to lower the carbon intensity of its operations and product offerings.
On January 27, MPC’s board of directors declared a dividend of $0.75 per share on common stock. The dividend was payable to shareholders on March 10, 2023. The annualized dividend rate of $3 yields 2.34% on prevailing prices. Its dividend has grown at a 7% CAGR over the past three years and a 10.4% CAGR over the past five years.
For the fourth quarter that ended December 31, 2022, MPC’s total revenues and other income increased 12.6% year-over-year to $40.09 billion. Its income from continuing operations was $4.74 billion, an increase of 166.5% year-over-year. Also, the company’s adjusted EBITDA rose 107.6% from the year-ago value to $5.80 billion.
Furthermore, the company’s adjusted net income increased 291.9% year-over-year to $3.11 billion, while its adjusted income per share came in at $6.65, up 411.5% year-over-year.
In terms of forward non-GAAP P/E, MPC is trading at 6.40x, 19.4% lower than the industry average of 7.94x. The stock’s forward EV/Sales multiple of 0.56 is 68.2% lower than the industry average of 1.75.
Analysts expect MPC’s EPS for the first quarter (ending March 2023) to increase 279.2% year-over-year to $5.50. Its revenue is expected to come in at $35.51 billion for the same quarter. Also, the company surpassed the revenue and EPS estimates in each of the trailing four quarters, which is impressive.
Shares of MPC have gained 32.3% over the past six months and 13.7% over the past three months to close the last trading session at $126.98.
MPC’s POWR Ratings reflect this promising outlook. The stock has an overall A rating, translating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
MPC has an A grade for Momentum and Quality and a B for Growth and Sentiment. In the 90-stock B-rated Energy – Oil & Gas industry, it is ranked #1.
Click here to see additional POWR Ratings for MPC (Value and Stability).
Valero Energy Corporation (VLO)
VLO manufactures and markets petroleum-based and low-carbon liquid transportation fuels and petrochemical products. The company 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 March 16, the company paid a quarterly dividend of $1.02 per share, representing an increase of 4.1% from the last quarter. This raises the annualized dividend rate on VLO’s common stock to $4.08 per share, which yields 3.21% on prevailing prices. Its dividend has grown at a 2.5% CAGR over the past three years and a 6.4% CAGR over the past five years.
In terms of forward EV/Sales, VLO is trading at 0.38x, 78.3% lower than the industry average of 1.75x. Likewise, its forward Price/Sales multiple of 0.38 is 74.1% lower than the 1.22 industry average.
VLO’s revenues increased 16.3% year-over-year to $41.75 billion in the fiscal 2022 fourth quarter (ended December 31, 2022). Its operating income improved 169.4% year-over-year to $4.29 billion. Adjusted net income attributable to VLO came in at $3.23 billion, up 226.6% year-over-year. The company’s adjusted earnings per share came in at $8.45, registering an increase of 250.6% from the prior-year period.
Street expects VLO’s EPS for the first quarter (ending March 31, 2023) to increase 182.6% year-over-year to $6.53. Its revenue is expected to come in at $37.42 billion for the same quarter. Moreover, the company surpassed the EPS estimates in each of the trailing four quarters.
Over the past year, the stock has gained 40.8% to close the last trading session at $131.77. Also, it has gained 22.5% over the past six months.
VLO’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has an A grade for Momentum and a B for Growth, Value, and Quality. In the same industry, it is ranked #4.
Click here to see the other ratings of VLO for Stability and Sentiment.
Consider This Before Placing Your Next Trade…
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MPC shares were trading at $129.66 per share on Thursday morning, up $2.68 (+2.11%). Year-to-date, MPC has gained 12.06%, versus a 4.64% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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