Even as fears revolving around high inflation and slowing growth somewhat cloud the outlook for Oil/Energy, it has continued to be the best S&P 500 sector this year. The space has generated a total return of almost 37% in 2022 compared with the S&P 500’s loss of around 20%.

Apart from a constructive fundamental picture, the sector is enjoying support from geopolitical uncertainty amid Russia’s military operations in Ukraine. In March, crude prices surged to multi-year highs of $130 on concerns about supplies from Russia, which is one of the world's largest producers of the commodity.

While oil has pulled back from those lofty levels, the conflict showing no sign of a quick resolution, the risk of dwindling inventory and the influential oil exporters’ group OPEC agreeing on a production curtailment. These give the commodity enough reasons to stay elevated in the near-to-medium term.

Naturally, some stocks have been impressive since the start of the year. These also have strong earnings trends to back up their moves.

One such company is Marathon Petroleum (MPC Quick QuoteMPC - Free Report) . The Findlay, OH-based company is a leading independent refiner, transporter and marketer of petroleum products. MPC, in its current form, came into existence following the 2011 spin-off of Houston, TX-based Marathon Oil Corporation’s refining/sales business into a separate, independent and publicly-traded entity. It operates primarily in two segments: Refining and Marketing, and Pipeline Transportation (or Midstream).

Let’s discuss the reasons that make Marathon Petroleum an attractive pick:

Solid Rank and VGM Score

Marathon Petroleum is a Zacks Rank #1 (Strong Buy) stock in the Zacks Oil and Gas - Refining & Marketing industry, which carries a Zacks Industry Rank #7 — placing it in the top 3% of more than 250 Zacks industries. In addition to the favorable rank, MPC enjoys a Zacks Value Style Score of A, Growth of A, and Momentum of A to help it round out with a VGM Score of A. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best upside potential.

Estimate-Beating Recent Earnings

MPC posted robust Q2 results on Aug 2, with earnings per share of $10.61, comfortably beating the Zacks Consensus Estimate of $9.17 and compared with a profit of merely 67 cents per share in the year-ago period. The company’s bottom line was favorably impacted by the stronger-than-expected performance of its Refining & Marketing segment, whose operating income totaled $7.1 billion, ahead of its Zacks Consensus Estimate by 108.4%. The company repurchased shares worth $4.1 billion during the May-July period and has now completed more than 80% of its target to buy back $15 billion in common stock.

Current Pullback a Buying Opportunity

After MPC shares bottomed out (in the mid-to-high teens) during the start of the pandemic, they have turned it around in style. MPC peaked in June at around $115 but have fallen to under $100 since then. Despite this drop, the stock is still up 48% on the year while the markets have gone lower. This powerful uptrend during a bear market indicates that investors should take advantage of the discounted levels and start looking at the name to see if its right for their portfolio. With the company experiencing the best market conditions in years, we believe that the Marathon Petroleum stock has enough firepower left to keep chugging along.
 

Image Source: Zacks Investment Research

Analyst Estimates Raised

MPC’s earnings revisions have also trended in the right direction over the last 60 days, as analysts have consistently taken up their numbers. As a matter of fact, the Zacks Consensus Estimate for Marathon Petroleum’s 2022 bottom line has gone up from a profit of $19 to $21.55 over the past 60 days, while next year’s number is a rise from $11.88 per share to $13.40.

Fundamental Strength

Marathon Petroleum's $23.3 billion acquisition of Andeavor has integrated the premier assets of both the companies, bolstering the scale and leadership position of the combined entity in the United States. As it is, the company’s access to lower-cost crude in the Permian, Bakken and Canada helps it to benefit from the differentials. MPC’s portfolio of midstream operations bode well too, somewhat reducing its exposure to volatile commodity price fluctuations.

The industry’s improved fundamentals in the form of constrained supply and robust demand have led to rising refining profitability for the players involved. With product inventories running low and no near-term solution to replenish them, margins (especially for diesel and jet fuel) have set all-time highs. While margins have moderated from those spectacular levels, they are still reasonably high. Overall, elevated consumption paired with considerably lower refining capacity in the OECD countries should provide a tailwind for refinery profits throughout the year. In particular, constrained Russian fuel exports in the wake of the Ukraine conflict have further tightened refining fundamentals. As a reflection of this, Marathon Petroleum’s Refining & Marketing segment reported operating income of $7.1 billion in the second quarter, which soared from the year-ago profit of just $224 million.

Last year, Marathon Petroleum sold its Speedway business to Japanese retail group Seven & i Holdings — owner of the 7-Eleven convenience store chain — for $21 billion. Apart from providing Marathon Petroleum with a much-needed cash infusion, the disposal of its Speedway-branded gas stations came with a supply agreement per which Marathon Petroleum will provide about 7.7 billion gallons of gasoline per year to 7-Eleven, thus ensuring a steady revenue stream.

Bottom Line

Given this backdrop, this appears to be the best time to consider buying Marathon Petroleum. While there are some apprehensions that the company may have gotten too far ahead of itself, especially with the inflation-trigerred cost increases, the tightness in product demand should keep refining margins elevated moving forward. All these suggest strong long-term cash flows that should support higher price points for its shares.

Other Energy Stocks to Buy

Along with Marathon Petroleum, investors interested in the energy sector might look at Chesapeake Energy (CHK Quick QuoteCHK - Free Report) , Murphy USA (MUSA Quick QuoteMUSA - Free Report) and Earthstone Energy , each sporting a Zacks Rank #1, currently.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Chesapeake Energy: Chesapeake is valued at some $12.4 billion. The Zacks Consensus Estimate for CHK’s 2022 earnings has been revised 26% upward over the past 60 days.

Chesapeake, headquartered in Oklahoma City, delivered a 30.2% beat in Q1. CHK shares have surged 75.6% in a year.

Murphy USA: Murphy USA is valued at some $6.5 billion. The Zacks Consensus Estimate for MUSA’s 2022 earnings has been revised 31.9% upward over the past 60 days.

Murphy USA, headquartered in El Dorado, AR, has a trailing four-quarter earnings surprise of 49%, on average. MUSA shares have gained 70% in a year.

Earthstone Energy: ESTE beat the Zacks Consensus Estimate for earnings in each of the last four quarters. The company has a trailing four-quarter earnings surprise of roughly 27%, on average.

Earthstone Energy is valued at around $1.9 billion. ESTE has seen its shares gain 52.3% in a year.