Marathon Petroleum Corporation (MPC) in Finlay, Ohio, engages primarily in refining, marketing, retailing, and transporting petroleum products in the United States. It operates in two segments: Refining & Marketing; and Midstream. In comparison, San Antonio, Tex.-based Valero Energy Corporation (VLO) manufactures, markets, and sells transportation fuels and petrochemical products in the United States, Canada, the United Kingdom, Ireland, and internationally. It operates through three segments: Refining; Renewable Diesel; and Ethanol.

On October 26, Brent futures rose to $86.40 per barrel, while U.S. West Texas Intermediate (WTI) crude settled at $84.65, marking their highest closes since October 2014. Analysts expect oil price strength to continue through year’s end because the global supply crunch shows no signs of subsiding. Furthermore, OPEC+ has also rejected calls to raise its output faster. Analysts expect oil prices to cross the $90 per barrel mark soon. “A jump to $90 oil seems likely,” noted Edward Moya, a senior market analyst at OANDA. Given the multi-year-high oil prices, both MPC and VLO should generate substantial returns.

But while MPC’s shares have gained 28.7% in price over the past six months, VLO has gained 17.8%. In terms of their past year’s performance, MPC is the winner with 128.2% gains versus VLO’s 97%. Also, MPC’s 64.9% gains year-to-date compare with VLO’s 46.2% returns.

But which stock is a better buy now? Let’s find out.

Latest Developments

In August, MPC and Archer-Daniels-Midland Company (ADM) announced a joint venture to produce soybean oil to supply the rapidly growing demand for renewable diesel fuel. The companies also plan to explore other opportunities for agricultural use of renewable transportation fuels. The move demonstrates MPC’s commitment to its sustainability targets. The collaboration “creates a platform for further collaboration with a world-class partner as we continue to invest in a sustainable, energy-diverse future,” noted Dave Heppner, MPC’s senior vice president of Strategy and Business Development.

Also in August, VLO announced that it would redeem the entire outstanding principal amount of its floating rate senior notes due 2023. The aggregate principal amount of the Notes outstanding is $575 million. The redemption is aligned with its plan to reduce its debt.

Recent Financial Results

For the second quarter, ended June 30, MPC’s total revenues increased 142.5% year-over-year to $29.83 billion. Its income from continuing operations grew 67.8% from its year-ago value to $965 million. Its net income attributable to MPC improved 94,477.8% from the same period last year to $8.51 billion, while its net income per share improved 129,900% year-over-year to $13.00.

VLO’s revenues increased 86.7% year-over-year to $29.52 billion in its fiscal third quarter ended September 30. Its operating income stood at $693 million, up 211.6% from the same period last year. And its net income attributable to VLO’s stockholders grew 199.8% from its year-ago loss to $463 million. The company’s EPS increased 199.1% year-over-year to $1.13.

Past and Expected Financial Performance

MPC’s revenues have grown at a 2.5% CAGR over the past three years. Analysts expect MPC’s revenue to increase 30.8% in the current quarter, 42.7% in the current year, and 1.2% in the following year. The company’s EPS is expected to grow 126.6% in the current quarter, 136.3% in the current year, and 184% in the next year. And its EPS is expected to grow 43.8% per annum over the next five years.

In comparison, VLO’s revenues have declined at a 6.2% CAGR over the past three years. Analysts expect the company’s revenue to increase 65.4% in the current quarter, 64.9% in the current year, and 7.6% in the next year. The company’s EPS is expected to grow 216% in the current quarter, 134% in the current year, and 452.8% in the following year. However, VLO’s EPS is expected to decline 13.8% per annum over the next five years.

Profitability

MPC is more profitable, with 8.57% and 4.90% respective gross profit and EBITDA margins, compared to VLO’s 3.37% and 2.77%.

Furthermore, MPC’s ROTC and net income margin of 0.86% and 8.72%, respectively, compare with VLO’s 0.27% and negative 0.49%.

Thus, MPC is more profitable here.

Valuation

In terms of forward P/E, VLO is currently trading at 82.34x, which is 93.9% higher than MPC’s 5.02x. Also, VLO’s 11.82 forward EV/EBITDA ratio is 25.6% higher than MPC’s 8.79.

Thus, MPC is relatively affordable here.

POWR Ratings

MPC has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. In comparison, VLO has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

MPC has a B grade for Quality. MPC’s 8.72% net income margin is 728% higher than the 1.05% industry average. In comparison, VLO has a C grade for Quality. This is justified because VLO’s negative 0.49% net income margin is lower than the industry average.

Both the stocks have a B grade for Momentum. This is justified because both are trading above their respective 50-day and 200-day moving averages.

Of the 89 stocks in the Energy – Oil & Gas industry, MPC is ranked #17, while VLO is ranked #33.

Beyond what we’ve stated above, we have also rated the stocks for Value, Stability, Growth, and Sentiments. Click here to view MPC ratings. Also, get all VLO ratings here.

The Winner

U.S. shale producers are expected to perform well in the coming months because analysts expect the oil prices to remain elevated. Thus, both MPC and VLO should benefit. However, its higher profitability and lower valuation we think make MPC a better buy here.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Energy – Oil & Gas industry here.

MPC shares fell $0.07 (-0.10%) in premarket trading Wednesday. Year-to-date, MPC has gained 70.76%, versus a 23.29% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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