Hitting a note of musical irony, Van Morrison sang, “My mama told me there’d be days like this.” And on a distinctly non-ironic note, top analysts may start saying the same thing. With inflation rising, interest rates rising and the stock market falling, we are in for more volatile days like this.
Looking at the big picture at JPMorgan, Dubravko Lakos-Bujas, the firm’s global head of macro equity research, notes the energy crisis – gas shortages in Europe, high global oil prices and reduced global production. Second, it highlights how energy stocks as a sector are well positioned for gains going forward.
“Without a resolution to the current energy crisis, the energy sector remains in a particularly sweet spot with very attractive valuations, strong fundamentals and significant improvement in quality… The sector should deliver strong relative growth and increasing return on capital at a very cheap valuation.” , while its balance sheet continues to strengthen. The industry’s strong fundamentals remain anchored in revenue growth and high margins,” said Lakos-Bougias.
Against this backdrop, JPMorgan’s stock analysts picked up on that thread and followed it to its logical conclusion: pulling the trigger on the energy stocks they see as future winners. We used the TipRanks database to call up the latest details on two of these JPM energy options. Here they are, along with comments from analysts.
SM Energy Company (SM)
We’ll start with a Denver-based hydrocarbon exploration and production company, SM Energy. SM has focused its operations in two core areas in five counties in the state of Texas, the West Texas Midland Basin and the South Texas Maverick Basin. The company has three rigs operating in the Midland area and 2 in the Maverick area. While this sounds decidedly modest, it’s important to remember that with horizontal drilling methods and fracking technology, a hydrocarbon company can tap a well or rig for high production.
A look at the numbers will tell that story. SM recorded total production of 13.3 million barrels of oil equivalent in 2Q22 (MMboe) or 146.6 thousand barrels of oil equivalent per day (Mboe/d). Of this 46% was oil and the rest natural gas and natural gas liquids. The company’s strong production numbers led to a strong 76% year-over-year increase in revenue, which came in at just over $992 million for the quarter.
The bottom line also benefited. SM’s earnings started to take off in the second half of 2021 and in 2Q12 totaled $323.5 million, or $2.19 per diluted common share. On a year-over-year basis, EPS rose dramatically, up from just 1 cent in the previous quarter. SM’s strong revenue and earnings came alongside record cash generation. The company generated $542.6 million in cash from operations and saw free cash flow of $276.6 million.
According to JPMorgan analyst Zach Parham, SM Energy is still at the beginning of a good time for investors. Supporting his view, he writes: “SM wants to keep its rigs busy and its high-performance crews busy, which we believe were viewed more favorably against a purely inflationary increase. The incremental activity is expected to deliver operational momentum in 2023 and adds to ~20 Permian wells that will be TIL’d in early 2023 after drilling and partial completion in 2022.”
“We continue to believe that SM’s capital efficiency in 2023 is undervalued… We estimate that SM will generate $1.07 billion FCF in FY23 (FCF yield of 24%) and expect that a significant portion of this FCF could be returned to shareholders. “, the analyst added.
Parham doesn’t just write an optimistic outlook. backs it with an Overweight (i.e. Buy) rating on the shares and a $60 price target that implies a one-year upside potential of ~39% from current levels. (To follow Parham’s history, Click here)
Overall, SM holds a Moderate Buy rating from the analyst consensus, based on 6 Buys and 1 Hold and Sell, each. Shares are priced at $43.26 and their average target of $61.97 suggests a 43% year-to-date upside. (See SM Stock Prediction on TipRanks)
Valero Energy Corporation (VLO)
Next is Valero Energy, one of the major players in the North American, Caribbean and UK refined fuels market. Valero operates 15 refineries in the US, Canada and the UK, along with 11 ethanol plants and a 50 megawatt wind farm. Valero’s business operates in three segments, refining, ethanol and renewable diesel. The company is the second largest producer of corn ethanol in global markets and the second largest producer of renewable diesel in the world.
Valero’s earnings and profits have been growing in 2020 and 2021 and really took off in 2Q12. The company reported revenue of $51.6 billion, up 86% year-over-year, and diluted EPS made an even more impressive year-over-year jump, from 63 cents to $11.36. Adjusted net income attributable to shareholders totaled $4.6 billion for the quarter.
The company consistently returns capital to shareholders, with a dividend of 98 cents per common share. The quarterly dividend payment has remained stable at its current level for nearly three years, and the annualized rate of $3.92 per common share yields an above-average yield of 3.44%. Valero has a 9-year history of keeping reliable dividend payments.
In the eyes of JPMorgan analyst John Royall, Valero’s record of strong fuel production and reliable return on capital are key points for investors to consider.
“VLO posted record results in Q2, while management comments suggest product market tightness will continue due to reduced post-pandemic refining capacity and little evidence of weakness in wholesale demand (despite broader data suggesting opposite). Management was bullish on fundamentals going forward and believes that cracks will be structurally higher in the next economic cycle than in previous cycles…. We are now shaping $2.2 billion in acquisitions for the second half of 2022 and $3 billion annually in 2023+,” noted Royall.
Royall continues to give VLO stock an Overweight (i.e. Buy) rating, along with a $148 price target that suggests a 30% upside over the next 12 months. (To follow Royall’s history, Click here)
In total, there are 13 recent analyst reviews on file for Valero Energy, including 11 Buys, 1 Hold and 1 Sell, for a consensus rating of Strong Buy. The stock is currently trading at $113.82 and the average price target of $142.85 suggests a 25.5% one-year gain from this level. (See Valero stock forecast at TipRanks)
To find good ideas for trading energy stocks at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that brings together all of TipRanks’ stock information.
Denial of responsibility: The views expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.