My Top Energy Stock Pick
A deep dive into one of the best performing energy companies of the last decade, and a trade idea for how to buy it at a discount (or earn a 30% yield)
It’s earnings season, and one company in the Ross Report portfolios just posted a blow out.
Fortunately, the share price hasn’t run ahead of the fundamentals… yet.
Today, I’ll provide part one of a deep dive into this world-class energy company. Plus, I’ll provide an options trade that will allow for one of two outcomes:
1) Enter the stock at a 7% discount from current prices
2) Generate a 30% annualized yield.
Last week, I wrote about the value of combining non-correlated and negatively correlated assets into a portfolio. The article noted that Treasuries (TLT) and energy stocks (XLE) currently sport a negative correlation. I believe this combination provides a great balancing act within a portfolio, for navigating today’s short-term inflationary pressures against the threat of long-term deflation, which will eventually return with gusto.
But simply buying a basket of energy stocks would leave a lot of upside on the table. So today, I’m drilling down into the fundamentals underlying my single favorite energy stock.
You’ll learn about the key structural advantages that made this company one of the best performing energy stocks of the last decade, and why I believe that outperformance will continue from here.
Let’s get started…
The stock in question is Valero (VLO), the world’s largest independent refiner.
With 15 refineries spanning across the U.S., Canada and the U.K, Valero can process up to 3.2 million barrels of crude oil per day into refined products. Last Friday, Valero reported third quarter earnings of $1.22 per share, or nearly 30% better than average analyst expectations of $0.95 per share. Annualized, that’s $4.88 per share. Based on last Friday’s closing price of just under $81, the stock trades at just over 16x earnings.
Meanwhile, management shared upbeat guidance about the path on refining margins and profits from here. It’s easy to see why when you consider the macro context…
Supply/Demand Imbalance Depletes U.S. Gasoline Stocks
The supply/demand story with gasoline and other refined products is similar to many other commodities today. After a record demand shock in 2020, the refining industry rightsized capacity. Then, a surge in stimulus spending pushed demand back faster than many expected, creating a supply squeeze.
The end result: a major drawdown in global refined products, including U.S. gasoline stocks, which have recently fallen to their lowest seasonal levels in over five years:
So while there’s clearly a cyclical tail-wind at the moment, the bullish thesis for Valero goes well beyond this one-time macro event. If we rewind the clock back to the previous decade, most energy investors suffered a lost decade. Valero, and the broader refining sector, was a lone standout.
From 2010 - 2019, Valero not only outperformed the energy sector, but it beat the broader stock market by over 400%:
Part of Valero’s performance comes from favorable industry dynamics, and part comes from the structural advantages it enjoys within the industry.
Let’s dive into each, starting with the competitive dynamics in the refining industry…