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Energy Stock Valuations Are Coming Down. Should You Buy?
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The energy sector has declined 12% over the past month although it is still up 15.4% year to date. The shutdowns in China and the rate hikes across major economies have increased concerns about reduced demand for oil that would be a natural fallout from shrinking economic activity.
While these concerns are not to be brushed aside, it’s worth noting that China shutdowns are unlikely to continue indefinitely. Also, OPEC+ is not meeting production targets because political disruptions in Libya continue to impact output. Investors also appear to be discounting the summer holiday-driven demand in Europe and North America.
As a result, crude prices, both WTI and Brent, continue to climb to above $110 a barrel. While gasoline prices were also impacted by the interest rate hike and the government’s consideration of a cap on exports, current prices are still close to around $5 a gallon, which is more than double the level it has been in the last five years.
So there is still a considerable imbalance between demand and supply, something that is likely to persist until there is some sort of normalcy in Ukraine.
Considering the above, the retreat in oil stock prices looks like an invitation to buy, particularly given the way that estimates continue to increase.
In the case of Zacks #1 (Strong Buy) ranked Marathon Petroleum Corp. (MPC - Free Report) for example, analysts have taken the current year EPS estimate up from $10.17 30 days ago to $13.72 today. Similarly, the 2023 estimate has gone from $7.99 to $10.08. This represents a 34.9% increase in the 2022 estimate and a 26.2% increase in 2023.
Additionally, earnings are expected to grow 460% this year on top of a 9% increase in revenue. Marathon Petroleum’s dividend yields 2.66%. The company trades at 7.27X forward earnings and 0.36X forward sales, both of which are close to its lowest point over the past year. So, the shares may be considered cheap.
Another oil refining and marketing stock worth considering is Phillips 66 (PSX - Free Report) . It is currently expected to grow revenue and earnings by 18% and 114% this year. Analysts have raised this Zacks #1 ranked company’s 2022 and 2023 earnings estimates by a respective 29.1% and 13.0% in the last 30 days.
Phillips 66 also pays a dividend that yields 4.29%. The company trades at 8.23X earnings 0.32X sales, both of which are below the respective median levels over the past year. Therefore, the shares are undervalued.
Valero Energy Corp. (VLO - Free Report) is a player in the same market. The Zacks Rank #1 stock is seeing an exceptionally strong estimate revisions trend. Earrings expectations for 2022 have doubled in the last 90 days. 2023 estimates are also growing strongly. In the last 30 days, the 2022 and 2023 estimates have jumped 26.2% and 35.0%, respectively.
Earnings growth expectations for the year are currently pegged at 493.6% and this is expected to come on top of revenue growth of 33.0%. Additionally, Valero’s dividend yields 3.49%. Trading at a P/E of 7.37X and a P/S of 0.30X sales, the shares are definitely worth buying at this point.
One-Month Price Performance
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Energy Stock Valuations Are Coming Down. Should You Buy?
The energy sector has declined 12% over the past month although it is still up 15.4% year to date. The shutdowns in China and the rate hikes across major economies have increased concerns about reduced demand for oil that would be a natural fallout from shrinking economic activity.
While these concerns are not to be brushed aside, it’s worth noting that China shutdowns are unlikely to continue indefinitely. Also, OPEC+ is not meeting production targets because political disruptions in Libya continue to impact output. Investors also appear to be discounting the summer holiday-driven demand in Europe and North America.
As a result, crude prices, both WTI and Brent, continue to climb to above $110 a barrel. While gasoline prices were also impacted by the interest rate hike and the government’s consideration of a cap on exports, current prices are still close to around $5 a gallon, which is more than double the level it has been in the last five years.
So there is still a considerable imbalance between demand and supply, something that is likely to persist until there is some sort of normalcy in Ukraine.
Considering the above, the retreat in oil stock prices looks like an invitation to buy, particularly given the way that estimates continue to increase.
In the case of Zacks #1 (Strong Buy) ranked Marathon Petroleum Corp. (MPC - Free Report) for example, analysts have taken the current year EPS estimate up from $10.17 30 days ago to $13.72 today. Similarly, the 2023 estimate has gone from $7.99 to $10.08. This represents a 34.9% increase in the 2022 estimate and a 26.2% increase in 2023.
Additionally, earnings are expected to grow 460% this year on top of a 9% increase in revenue. Marathon Petroleum’s dividend yields 2.66%. The company trades at 7.27X forward earnings and 0.36X forward sales, both of which are close to its lowest point over the past year. So, the shares may be considered cheap.
Another oil refining and marketing stock worth considering is Phillips 66 (PSX - Free Report) . It is currently expected to grow revenue and earnings by 18% and 114% this year. Analysts have raised this Zacks #1 ranked company’s 2022 and 2023 earnings estimates by a respective 29.1% and 13.0% in the last 30 days.
Phillips 66 also pays a dividend that yields 4.29%. The company trades at 8.23X earnings 0.32X sales, both of which are below the respective median levels over the past year. Therefore, the shares are undervalued.
Valero Energy Corp. (VLO - Free Report) is a player in the same market. The Zacks Rank #1 stock is seeing an exceptionally strong estimate revisions trend. Earrings expectations for 2022 have doubled in the last 90 days. 2023 estimates are also growing strongly. In the last 30 days, the 2022 and 2023 estimates have jumped 26.2% and 35.0%, respectively.
Earnings growth expectations for the year are currently pegged at 493.6% and this is expected to come on top of revenue growth of 33.0%. Additionally, Valero’s dividend yields 3.49%. Trading at a P/E of 7.37X and a P/S of 0.30X sales, the shares are definitely worth buying at this point.
One-Month Price Performance
Image Source: Zacks Investment Research