The energy industry seems to be at a crossroads. While recessionary concerns have pulled down prices from their summer highs, a tight supply could prevent them from dropping considerably. The Russia-Ukraine war has also created significant volatility in the market.
Meanwhile, a prospective disruption to Russia’s petroleum exports from the planned G7 price cap and the OPEC+ production target cuts have made hedge funds bullish on crude oil.
As the European Union embargo on Russian exports comes into effect in December, crude oil prices could rise again on tight supply. Riyadh-based International Energy Forum (IEF) projects Brent crude prices to easily rise above $100 per barrel again if supply losses from Russia reach 3 million barrels per day (BPD).
Given these industry tailwinds, fundamentally strong oil and gas stocks Valero Energy Corporation (VLO) and Birchcliff Energy Ltd. (BIREF) might be solid buys.
Valero Energy Corporation (VLO)
VLO manufactures, markets, and sells petrochemical products and transportation fuels. The company operates through its three broad segments – Refining; Renewable Diesel; and Ethanol.
On October 26, VLO announced a regular quarterly dividend on the common stock of $0.98 per share, payable to shareholders on December 8. This reflects upon the cash generation ability of the company.
On September 26, VLO announced that it had reduced its debt by approximately $1.25 billion through its previously announced tender offers for various senior notes. The company also declared a collective debt reduction of approximately $3.60 billion through transactions in the second half of 2021 and the first half of 2022.
For the fiscal third quarter ended September 30, VLO’s revenues increased 50.6% year-over-year to $44.45 billion. Adjusted net income attributable to VLO stockholders rose 413% from the prior-year quarter to $2.80 billion. Adjusted earnings per common share improved 436.8% year-over-year to $7.14.
The consensus EPS estimate of $6.44 for the current quarter (ending December 2022) indicates a 160.6% year-over-year increase. Likewise, the consensus revenue estimate for the same quarter of $42.67 billion reflects an improvement of 18.9% from the prior-year period.
Moreover, VLO has an impressive surprise earnings history, as it has topped consensus EPS estimates in each of the trailing four quarters.
The stock has gained 70% over the past year and 76.1% year-to-date to close its last trading session at $132.25. It is up 16.2% over the past month.
VLO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
VLO has a Momentum grade of A and a Growth, Value, and Quality grade of B. In the 94-stock Energy – Oil & Gas industry, it is ranked #6. The industry is rated B.
Click here to see the additional POWR Ratings for VLO (Stability and Sentiment).
Birchcliff Energy Ltd. (BIREF)
Headquartered in Calgary, Canada, BIREF operates as an intermediate oil and natural gas company. It acquires, explores, develops, and produces natural gas, light oil, condensate, and natural gas liquids in Western Canada.
On October 13, BIREF announced a special dividend of C$0.20 per common share. The company expects to retire approximately C$840 million ($623.38 million) of total debt and preferred shares from June 30, 2020, reaching its zero-total-debt goal.
In August, BIREF declared a quarterly dividend of C$0.02 per common share for the quarter ending September 30, 2022. The dividend was payable on October 3.
BIREF’s revenue increased 118.6% year-over-year to C$409.37 million ($303.81 million) in the fiscal second quarter ended June 30. Its net income and comprehensive income improved 378.6% from the prior-year quarter to C$214.90 million ($159.48 million). Net income per common share came in at C$0.77, up 381.3% year-over-year.
Street revenue estimate for the fiscal fourth quarter (ending December 2022) of $312.25 million reflects a rise of 36.5% year-over-year. Analysts expect BIREF’s revenue for the fiscal year 2022 to come in at $1.06 billion, indicating a 43.4% year-over-year increase.
Over the past year, the stock has gained 39.2%. It has gained 55.9% year-to-date and 3.2% over the past month to close its last trading session at $7.95.
It’s no surprise that BIREF has an overall A rating, which translates to a Strong Buy in our POWR Rating system. The stock also has an A grade for Momentum and a B for Growth and Quality. It is ranked #5 in the Energy – Oil & Gas industry.
In addition to the POWR Rating grades we’ve stated above, one can see BIREF ratings for Value, Stability, and Sentiment here.
VLO shares were unchanged in premarket trading Wednesday. Year-to-date, VLO has gained 81.12%, versus a -18.64% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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