The growing oil and gas demand and tightened supply could trigger an oil price surge, fortifying sustained impetus for energy sector players. This situation could stimulate investor activity within the energy sector, mainly centered around companies poised to profit.
Against this backdrop, fundamentally sound energy stocks Delek US Holdings, Inc. (DK), CVR Energy, Inc. (CVI), and Valero Energy Corporation (VLO) could be solid buys now to garner significant returns.
Despite an evident shift toward sustainable energy resources, oil and gas demand appears tenacious, with future projections indicating an increased consumption of these non-renewable fuels.
The International Energy Agency (IEA) has revised its oil demand growth forecast in 2023 to 2.4 million barrels per day (bpd), while for 2024, it stands at 930,000 bpd, an increase from the earlier estimate of 880,000 bpd. OPEC projects oil demand to surge by 2.5 million barrels per day (bpd) in 2023, potentially expanding by an additional 2.25 million bpd by 2024.
The geopolitical landscape, exemplified by the ongoing Russia-Ukraine and Israel-Hamas conflicts, injects volatility into oil prices. The World Bank cautioned that a pronounced escalation of the Israel-Hamas war, possibly escalating into a broader Middle East conflict, could provoke an oil price surge of up to 75%.
Increased oil prices are further anticipated due to recent oil spills in the Gulf of Mexico and Saudi Arabia and Russia’s supply cuts. Barclays said, "We have maintained that OPEC+ are likely to maintain a relatively aggressive stance in managing market expectations and...we will not be surprised to see the voluntary reductions being extended into next year."
Amid tightening oil supplies, the market can expect ascending fuel prices. JPMorgan forecasts a steady market in 2024 at an average Brent crude oil price of $83 per barrel.
In light of these encouraging trends, let's look at the fundamentals of the three Energy - Oil & Gas stocks, beginning with number 3.
Stock #3: Delek US Holdings, Inc. (DK)
DK engages in the integrated downstream energy business in the United States. The company operates through three segments: Refining; Logistics; and Retail.
In the fiscal fourth quarter, DK’s board of directors increased the quarterly dividend for the fifth consecutive quarter to $0.24 per share. Its annual dividend rate of $0.96 per share translates to a 3.51% yield on the current price level. Its four-year average dividend yield is 3.29%.
During the third quarter, DK returned $40.2 million to shareholders through dividends and share buybacks and returned $130.3 million of capital year-to-date. In addition, it repurchased $20 million in shares.
DK’s trailing-12-month cash per share of $13.94 is significantly higher than the industry average of $0.90. Likewise, the stock’s 2.13x trailing-12-month asset turnover ratio is 289.3% higher than the industry average of 0.55x.
In the fiscal third quarter that ended September 30, 2023, DK’s net revenues came at $4.75 billion, while operating income came at $224.70 million, up 324% year-over-year. Its adjusted EBITDA came at $345.10 million.
Its adjusted net income and adjusted net income per share stood at $131.90 and $2.02, respectively. As of September 30, 2023, total long-term debt stood at $2.64 billion, compared to $3.05 billion as of December 31, 2022.
Analysts expect DK’s revenue and EPS estimates to be $16.41 billion and $4.23, respectively, for the fiscal year ending December 2023. It has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
Over the past six months, the stock has gained 18.7% to close the last trading session at $27.34. It has gained 2.6% over the past three months.
DK’s promising prospects are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Growth and a B for Value. It is ranked #18 within the 85-stock Energy – Oil & Gas industry.
Beyond what we have highlighted above, one can see DK’s ratings for Momentum, Stability, Sentiment, and Quality here.
Stock #2: CVR Energy, Inc. (CVI)
CVI engages in petroleum refining and nitrogen fertilizer manufacturing activities in the United States. It operates in two segments: Petroleum and Nitrogen Fertilizer.
In addition to CVI’s third quarter 2023 cash dividend of 50 cents, its Board of Directors approved a special dividend of $1.50 per share, bringing the year-to-date declared dividends to $4 per share. This reflects its investor payback abilities.
Its annual dividend rate of $2 per share translates to a 6.27% yield on the current price level. Its dividends grew at a 23.1% CAGR over the past five years. Its four-year average dividend yield is 13.55%.
CVI’s trailing-12-month ROCE, ROTC, and ROTA of 104.15%, 30.13%, and 17.87% are 432.9%, 224%, and 145.8% higher than the industry averages of 19.55%, 9.30%, and 7.27%, respectively. Likewise, the stock’s 2.25x trailing-12-month asset turnover ratio is 311.5% higher than the industry average of 0.55x.
In the fiscal third quarter that ended September 30, 2023, CVI’s net sales came at $2.52 billion, while operating income came at $445 million, up 332% year-over-year. Its adjusted EBITDA remained flat over the prior-year quarter to $313 million.
Its net income attributable to CVI stockholders rose 279.6% year-over-year to $353 million. Also, its adjusted earnings per share came at $1.89. Moreover, its free cash flow stood at $318 million, up 241.9% from the year-ago quarter.
Analysts expect CVI’s revenue and EPS estimates to be $9.48 billion and $5.89, respectively, for the fiscal year ending December 2023. CVI surpassed the consensus revenue and EPS estimates in three of the trailing four quarters.
Over the past six months, the stock has gained 25.6% to close the last trading session at $31.92. It has gained 1.9% year-to-date.
CVI’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 Quality and a B for Value. It is ranked #8 within the same industry.
Click here to see the other ratings of CVI for Growth, Momentum, Stability, and Sentiment.
Stock #1: Valero Energy Corporation (VLO)
VLO produces, markets, and sells transportation fuels and petrochemical products. The company’s segments include Refining; Renewable Diesel; and Ethanol. Its product portfolio includes a range of fuels like gasoline, diesel, jet fuel, and asphalt, as well as petrochemicals such as aromatics and sulfur crude oils.
The Sustainable Aviation Fuel (SAF) project at the DGD Port Arthur plant remains on track for its slated 2025 completion. Poised to precipitate a paradigm shift in the industry, the project is expected to give the plant the capacity to upgrade approximately 50% of its current 470-million-gallon renewable diesel annual production capacity to SAF. With the completion of the project, DGD is expected to ascend the ranks as one of the world’s leading producers of SAF.
On November 7, VLO’s Board of Directors declared a regular quarterly dividend on common stock of $1.02 per share, payable to the holders on December 20. The company has a record of paying dividends for 26 consecutive years.
Its annual dividend rate of $4.08 per share translates to a 3.31% yield on the current price level. Its dividends grew at 1.3% and 5% CAGRs over the past three and five years, respectively. Its four-year average dividend yield is 4.85%.
During the third quarter, the company returned $2.2 billion to stockholders, of which $360 million was paid as dividends and $1.8 billion for purchasing approximately 13 million shares of common stock.
VLO’s trailing-12-month ROCE, ROTC, and ROTA of 44.73%, 24.68%, and 17.01% are 128.8%, 165.4%, and 133.9% higher than the industry averages of 19.55%, 9.30%, and 7.27%, respectively. Its trailing-12-month cash from operations of $12.09 billion is significantly higher than the industry average of $688.14 million.
For the fiscal third quarter that ended September 30, 2023, VLO’s revenues amounted to $38.40 billion, while its operating income came in at $3.50 billion. During the same quarter, its adjusted net income attributable to VLO stockholders stood at $2.62 billion, while adjusted earnings per common share stood at $7.49, up 4.9% from the prior-year quarter.
In addition, as of September 30, 2023, the company’s cash and cash equivalents included in current assets amounted to $5.83 billion, compared to $4.86 billion as of December 31, 2022.
Analysts expect VLO’s revenue and EPS estimates to be $147.42 billion and $24.97, respectively, for the fiscal year ending December 2023. Also, the company topped the consensus EPS estimates in each of the trailing four quarters.
VLO has gained 2.8% over the past five days to close the last trading session at $125.36. It gained 11.1% over the past six months.
VLO’s robust prospects are reflected in its POWR Ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system.
VLO has an A grade for Quality and a B for Value. It is ranked #6 within the same industry.
To see additional POWR Ratings for Growth, Momentum, Stability, and Sentiment for VLO, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
VLO shares were unchanged in premarket trading Thursday. Year-to-date, VLO has gained 2.08%, versus a 20.30% 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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