Everyone knows now that the energy sector was the place to be last year. It was an outlier and one of the few to avoid the market crash of 2022. As Russia invaded Ukraine and energy prices went up, energy stocks did much better than the market as a whole.
Kevin O’Leary, one of the stars of “Shark Tank,” thinks there are still plenty of chances in the segment for those who are sad about a missed chance.
“I love energy. Everybody hates energy… Go where people hate it. Energy is the driving pivot.” “The cash flow, the distribution… that sector is looking golden right now.”
Energy stocks are likely to do well in the future, and O’Leary is not the only one who thinks this. Taking a cue from O’Leary, we looked through the TipRanks database to find out more about three stocks that Wall Street is very excited about. All three are rated as Strong Buys by the majority of analysts. Let’s look at what makes them good choices for investments right now.
The Valero Energy Company (VLO)
Valero Energy is the largest independent refiner in the world, with a market capitalization of more than $50 billion. The company, which is based in San Antonio, Texas, runs 15 refineries in the U.S., Canada, and the U.K., with a total capacity of about 3.2 million barrels per day. It is also the second largest producer of renewable fuels in the world.
All of this is a recipe for success in the current environment, as the latest results from the fourth quarter showed. The company made more than three times as much money as it did during the same time last year. Its net income was $3.1 billion, which is equal to $8.45 per share. This number was also much higher than the $7.22 prediction.
Also, Valero’s refineries were used 97% of the time, which was the best rate since 2018. This let the company take advantage of the big difference in price between crude oil and finished products. Because of this, the operating profit for the refining segment went up by 230%, to $4.1 billion.
Valero was able to pay down its debt by $2.7 billion last year because of how well it did, and the company was able to give more cash back to its shareholders because of its better balance sheet. So, the company raised its dividend payout by 4% in January, to $1.02 per share. The dividend gives a 3.1% yield, based on an annualized rate of $4.08.
Raymond James analyst Justin Jenkins has good things to say about this energy giant. He sees a lot to like about it.
The 5-star analyst said-
“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 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.”
Jenkins gives VLO shares a Strong Buy rating, and his price target of $174 suggests that the stock will gain 25% over the next year. As for the rest of Wall Street, this is a win for the bulls. The word on the street is that VLO is a Strong Buy because there have been 14 buys and only one sell. (See the forecast for VLO stock)
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Magnolia Oil & Gas (MGY)
Next up is Magnolia Oil & Gas, a company that only explores for and makes oil and gas. Most of MGY’s work is done in the Eagle Ford Shale and Austin Chalk formations in South Texas. It owns a total of 460,000 net acres in the Giddings area and Karnes County. The Giddings area is seen by the company as a “reviving oil play” with “extensive inventory potential” and a lot of room to grow.
When the company reported its Q4 earnings last month, growth was on the menu for the profitability profile. The company made $254.8 million in net income during the quarter. This is up from $192.1 million during the same time last year. That led to an EPS of $1.20, which was a lot more than the $0.78 that analysts had expected. The total amount of oil and oil equivalents made in the quarter went up by 6% from the same time last year to 73.8 thousand barrels per day.
During Q4, the company also repurchased 2.4 million shares for $57.8 million, which is not too far off from Q3’s $61 million. The company still has 8.9 million shares left on the repurchase authorization program. MGY has also always paid its dividends on time, and at the end of January, the company raised the amount by 15%, to $0.115. This made the dividend’s annualized value $0.46 per share and the yield 2.08%. Neil Dingmann, an analyst at Truist, thinks it all adds up to a company that gives its shareholders what they want.
The 5-star analyst wrote-
“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 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.”
Dingmann gives MGY shares a Buy rating and a $29 price target based on the information above. What does this mean for investors? Upside of about 27% from where it is now. Other places on Wall Street have given the stock a Strong Buy rating because 5 Buys are more than 1 Hold. With an average target of $29.86, the forecast calls for a return of about 31% over the next 12 months.
Cheniere Energy (LNG)
Cheniere Energy is the last energy stock we’ll look at. Cheniere Energy is a player in liquefied natural gas (LNG), which is clear from its ticker. In fact, Cheniere was the first U.S. company to export LNG in 2016.
The Houston, Texas-based company is now the largest LNG producer in the United States and the second largest LNG operator in the world. The company’s LNG facilities are in Southwest Louisiana and South Texas. Cheniere is proud to serve dozens of markets on five continents, and it thinks that the demand for its fuel will only grow as countries around the world look for cleaner ways to power their economies.
In the company’s most recent quarterly report, for 4Q22, that was very clear. The revenue grew by 38.6% from the previous year to $9.09 billion, which was $1.05 billion more than what Wall Street had predicted. The company’s adjusted EBITDA was about $3.1 billion, compared to $1.34 billion during the same time last year. The company expects its adjusted EBITDA to be between $8 billion and $8.5 billion for the whole company in 2023.
Analyst Jeremy Tonet at J.P. Morgan said that the print “delivered on multiple fronts,” including better-than-expected EBITDA guidance for 2023 and better-than-expected Q4 EBITDA estimates. Tonet also said, “Unlike most of the other companies we follow, Cheniere showed a strong commitment to share buy-backs, with over $700 million done in the fourth quarter and a lot of room left on the $6 billion program.” At the same time, Cheniere paid off $5.4 billion in debt in 2022. This shows that the company has strong 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.”
Tonet’s “Overweight” (Buy) rating for LNG is based on these positive comments, and his price target of $209 means that shares should rise by about 28% over the next year.
All of Tonet’s coworkers agree with this assessment; the stock’s Strong Buy rating is based on 13 Buys, all of which are unanimous. Given that the average target price is currently $195.62, the analysts think that the shares will give a return of about 20% over the next year. As a small bonus, the company pays dividends on a regular basis. At the moment, these dividends yield 1% per year. (See the outlook for LNG stocks)