Everybody knows now, the energy sector was the place to be last year as the segment was an outlier and one of the few to sidestep 2022’s market carnage. Fueled by rising energy prices amidst Russia’s invasion of Ukraine, overall, energy stocks significantly beat the market.
For those mourning a missed opportunity, ‘Shark Tank’ star Kevin O’Leary thinks opportunities in the segment are still abundant.
“I love energy. Everybody hates energy… Go where people hate it. Energy is the driving pivot.” O’Leary said. “The cash flow, the distribution… that sector is looking golden right now.”
O’Leary is not the only one thinking energy stocks are primed for more success. Taking a cue from O’Leary, we dipped into the TipRanks database and got the lowdown on three names for which the Street has big hopes – all are rated as Strong Buys by the analyst consensus. Let’s see what makes them appealing investment choices in the current climate.
Valero Energy Corporation (VLO)
With a market-cap over $50 billion, Valero Energy is the world’s largest independent refiner. The San Antonio, Texas-based player operates 15 refineries in the U.S., Canada and the U.K. and boasts a total throughput capacity of around 3.2 million barrels per day. Not only that, but it is also the second largest renewable fuels producer in the world.
All this adds up to a recipe for success in the current climate, as was evident in the latest fourth-quarter results. The company notched profits that more than tripled from the same period last year as net income clocked in at $3.1 billion, amounting to adj. EPS of $8.45 per share. That figure also came in well ahead of the $7.22 forecast. Moreover, at 97%, Valero’s refineries showed their best utilization rate since 2018. This allowed the company to take advantage of the large gap between the prices of crude oil prices and refined product prices. The upshot of that was a 230% increase for the refining segment’s operating profit – to $4.1 billion.
Given the performance, Valero was also able to lower its debt load by $2.7 billion last year, and the improved balance sheet provided the company with the means to return more cash to shareholders. As such, In January, the company upped its dividend payout by ~4% to $1.02 per share. With an annualized rate of $4.08, the dividend gives a 3.1% yield.
This energy giant has drawn plaudits from Raymond James analyst Justin Jenkins, who sees plenty to like here.
“We believe Valero remains extremely well-positioned to capitalize on the strength of the global refining backdrop as the ripple effects of Europe’s energy crisis add to the advantages of VLO’s top-tier portfolio,” the 5-star analyst said. “The company’s disciplined strategy has positioned VLO at the forefront of refining operations and broadened its footprint in both the renewable diesel and carbon capture spaces, all while re-fortifying its balance sheet. The stout combination will allow shareholder returns to ramp during 2023, positioning VLO to re-rate further.”
Accordingly, Jenkins rates VLO shares a Strong Buy while his $174 price target suggests the stock will post gains of 25% over the coming year. (To watch Jenkins’ track record, click here)
Turning to the rest of the Street, the bulls have it on this one. With 14 Buys, and just a single Sell, the word on the Street is that VLO is a Strong Buy. (See VLO stock forecast)
Magnolia Oil & Gas (MGY)
Next up is Magnolia Oil & Gas, a pure-play oil and gas E&P (exploration and production) company. Most of MGY’s operations are concentrated in South Texas’s Eagle Ford Shale and Austin Chalk formations. Its holdings consist of a combined 460,000 net acres in the Giddings area and Karnes County, the former of which the business views as a resurgent oil play with ‘extensive inventory potential’ and significant room for growth.
Growth was on the menu for the profitability profile when the company reported Q4 earnings last month. The company dialed in net income of $254.8 million in the quarter, up from $192.1 million in the same period a year ago. That translated to EPS of $1.20, some distance above the $0.78 anticipated by the analysts. Total production in the quarter increased by 6% year-over-year to 73.8 thousand barrels of oil equivalent per day.
During Q4, the company also repurchased 2.4 million shares for $57.8 million, not far off Q3’s $61 million, and the company has 8.9 million shares left on the repurchase authorization program.
MGY has also shown a consistent commitment to paying out its dividend, and in late January, the company raised the payment by 15% to $0.115. This brought the annualized value of the dividend to $0.46 per share, and makes the yield 2.08%.
For Truist analyst Neil Dingmann, it all adds up to a company that delivers the goods to its shareholders.
“We continue to favor MGY’s relatively methodical shareholder return plan that includes dividends that will not exceed 50% of the prior year’s reported Net Income and opportunistic share repurchases of at least 1% of total shares each quarter,” the 5-star analyst wrote. “The flexible shareholder return program ensures the company maintains its pristine balance sheet while having ample dry powder to materially participate if the large equity sponsor decides to sell some, or all of its remaining 13% total shares. MGY’s operational plan remains stable with two rigs continuing with one focused on their highest return development activity, and the other is focused on both developmental and delineation activity.”
Based on the above, Dingmann rates MGY shares a Buy along with a $29 price target. The implication for investors? Upside of ~27% from current levels. (To watch Dingmann’s track record, click here)
Elsewhere on the Street, with 5 additional Buys outgunning 1 Hold, the stock claims a Strong Buy consensus rating. The forecast calls for 12-month returns of ~31%, considering the average target currently stands at $29.86. (See MGY stock forecast)
Cheniere Energy (LNG)
The last energy stock we’ll look at is Cheniere Energy. As implied by its ticker, Cheniere Energy is a liquefied natural gas (LNG) player, and in fact, in 2016, Cheniere was the first U.S. company to export liquefied natural gas.
Today, the Houston, Texas-based firm is the U.S.’s largest producer of LNG and the second biggest LNG operator in the world. The company’s LNG facilities are in Southwest Louisiana and South Texas, and Cheniere prides itself on servicing dozens of markets across five continents, believing that as countries across the globe look for cleaner ways to power their economies, the demand for its fuel will only increase.
That was quite evident in the company’s most recent quarterly statement – for 4Q22. Revenue grew by 38.6% year-over-year to $9.09 billion, beating the Street’s call by $1.05 billion. The company delivered consolidated adjusted EBITDA of roughly $3.1 billion, compared to 1.34 billion in the same period a year ago. For 2023, the company expects consolidated adjusted EBITDA in the range between $8.0 billion and $8.5 billion.
For J.P. Morgan analyst Jeremy Tonet, the print “delivered on multiple fronts,” including better-than-expected 2023 EBITDA guidance, and bettering Q4 EBITDA estimates. Additionally, Tonet said, “Unlike most others in our coverage, Cheniere demonstrated a strong commitment to share buy-backs, with over >$700mm executed in 4Q and plenty of room left on the $6bn program. At the same time, Cheniere redeemed $5.4bn of debt in 2022, highlighting robust financial flexibility.”
Summing up, Tonet further said, “We continue to see value in the company’s top-tier, long-term take-or-pay contract portfolio, leverage to incremental LNG demand (and capturing market share as other sources decline), and unrivaled execution.”
These bullish comments underpin Tonet’s Overweight (i.e., Buy) rating on LNG, while his $209 price target implies share appreciation of ~28% over the one-year timeframe. (To watch Tonet’s track record, click here)
Amongst Tonet’s colleagues, there’s total agreement with that assessment; the stock’s Strong Buy consensus rating is based on a unanimous 13 Buys. The analysts see shares delivering returns of ~20% over the coming year, given the average target currently stands at $195.62. As a small bonus, the company pays regular dividends that currently yield 1% annually. (See LNG stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.