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02.12.2023The first six months of 2022 have been harrowing for stock market investors. In addition to a weak macro-environment, market participants have to wrestle with multiple interest rate hikes, supply chain disruptions, steep valuations of growth stocks, rising commodity prices, and the Russia-Ukraine war.
While stocks across sectors have experienced a sustained sell-off, energy companies have delivered outsized gains in 2022 due to rising oil prices. As a result, the S&P 500 index is down 19%, while the Energy Select Sector SPDR Fund has risen 33.4% year-to-date.
Let’s look at three energy stocks that have delivered market-thumping returns this year.
Occidental Petroleum
Shares of Occidental Petroleum (NYSE: OXY) have more than doubled, rising 109.4% year-to-date. Warren Buffett’s Berkshire Hathaway also recently increased its position in Occidental Petroleum, driving investor optimism higher. Berkshire now owns 153.5 million shares of OXY, valued at $9.24 billion at current prices.
In Q1 of 2022, Occidental Petroleum reported adjusted earnings of $2.12 per share, compared to a loss of $0.15 per share in the year-ago quarter. Its massive expansion in profit margins allowed the company to repay $3.3 billion of debt, accounting for 12% of total outstanding principal.
Its operating cash flow stood at $3.2 billion as Occidental Petroleum spent $858 million in capital expenditures. Occidental Petroleum expects pre-tax earnings between $2.1 billion and $2.4 billion in 2022.
In its earnings presentation, Occidental disclosed it aims to reduce debt by $5 billion and reduce net debt to $20 billion in the near term, further strengthening its balance sheet.
Investors remain optimistic about OXY stock and expect it to gain another 25% in the next year.
Constellation Energy Corp.
Shares of Constellation Energy (NASDAQ: CEG) are up 55% in 2022. Valued at $18.8 billion by market cap, Constellation Energy generates and sells electricity in the U.S. It has 32,400 megawatts of generating capacity across nuclear, solar, wind, natural gas, and hydroelectric assets.
In Q1 of 2022, Constellation Energy reported adjusted EBITDA of $866 million and reduced net debt by $2.5 billion. It now expects to end the year with adjusted EBITDA between $2.35 billion and $2.75 billion.
Analysts tracking Constellation Energy expect the company to improve earnings to $4.29 per share in 2023, compared to a loss of $0.63 per share in 2021. So, it’s valued at 13.4 next year’s earnings which is quite reasonable.
Despite its outsized returns, the stock is trading at a discount of 20%, compared to consensus
price target estimates.
Valero Energy
The final stock on my list is Valero Energy (NYSE: VLO), which surged 44% in 2022. In Q1 of 2022, Valero reported revenue growth of 85% year-over-year. In the last 12 months, its total revenue surpassed $131.5 billion, which was the highest for the company over the previous seven years.
Valero’s operating margin in the last year also improved to 3.2%, compared to a negative 2.3% reported during the bear market of 2020.
In Q1, Valero reported an adjusted net income of $944 million or $2.31 per share, compared to a loss of $666 million or $1.64 per share in the year-ago period.
Valero returned $545 million to shareholders, including $401 million via dividends, indicating a payout ratio of 44%. It also reduced long-term debt by $750 million, ending the quarter with total debt of $13.2 billion and $2.6 billion in cash.
Valero stock is trading at a discount of almost 30% compared to consensus price target estimates, indicating more upside potential for investors in the next year.
