2022 has been a brutal year for all types of financial assets with the S&P 500 down more than 25% YTD and equal amounts of pain for the bond market. This is the unfortunate reality of a slowing economy and a hawkish central bank.

However, one bright spot amid the turmoil has been energy stocks. YTD, the Energy Select SPDR (XLE) is up 47%. The biggest factor in this strength is the war between Russia and Ukraine which has led to tightness in supply and rising electricity prices for European countries and exacerbating the inflation situation. Another is that production was dramatically cut during the pandemic and this supply has not been fully restored, while demand was more resilient than expected.

Looking ahead, the supply and demand dynamics for energy are only going to keep improving. For one, the US government sales of the strategic petroleum reserve (SPR) have almost been exhausted, and it will be a buyer in 2023. OPEC+ just announced cuts of 2 million barrels per day. Analysts also expect that Russian oil production will gradually decline due to the sanctions which will make it more difficult and expensive to keep oil fields running as efficiently. Chinese demand will also inevitably return as many expect a change in stringent COVID policies following President Xi securing his third term. Finally, energy prices have weakened in recent months due to increasing recession risk which has created an attractive buy the dip opportunity.

Here are 3 energy stocks that investors should consider buying:

Valero Energy (VLO)

VLO manufactures, markets, and sells transportation fuels and petrochemical products globally. The company operates through three segments: Refining; Renewable Diesel; and Ethanol.    

VLO offers investors a solid income stream due to its nearly 3.6% dividend yield. It also has a forward P/E of 6.8. While gasoline prices have declined over the last few months, the underlying supply issues are likely to rear its head if demand comes back or there are disruptions of any kind. 

The consensus EPS estimate of $7.20 for the fiscal third quarter that ended September 2022 indicates a 489.9% improvement year-over-year. Revenue is expected to increase 51.9% from the same period last year to $44.85 billion for the same quarter. Additionally, VLO has topped consensus EPS estimates in each of the trailing four quarters, which is impressive.  

This promising prospect is reflected in VLO’s POWR Ratings. VLO has an overall A rating which translates to a Strong Buy in our proprietary rating system. VLO is rated an A in Growth and Momentum and a B in Value and Quality. Within the B-rated Energy – Oil & Gas industry, it is ranked #7 out of 94 stocks. Click here to see VLO’s complete POWR Ratings.

Occidental Petroleum (OXY)

OXY is an independent oil and gas exploration company that operates primarily in the United States, the Middle East, Africa, and Latin America​​.​ The company operates through three segments: Oil & Gas; Chemical and Marketing; and Midstream. In addition to oil, the company also produces basic chemicals, petrochemicals, and specialty chemicals. About 50% of its reserves are oil with the other 50% being natural gas.

OXY has been in the news quite a bit as Warren Buffett is aggressively buying shares of the company. It’s also growing evidence that Buffett sees energy as being a great place to invest as he has built a mini conglomerate – Berkshire Energy that includes renewables, midstream assets, utilities, and oil exploration. Currently, he owns 27% of the company and received approval from regulators to acquire up to 50%.

It’s not surprising that Buffett desires the company given its strong assets, massive cash flow, and strategy to pay off debt and buy back shares. OXY’s POWR Ratings reflect this positive outlook. OXY’s Momentum Grade of A is consistent with the stock’s status as one of the leading energy stocks in the market even after its recent pullback. It also has B for Growth due to expectations of 35% earnings growth over the next year. Click here to see the complete POWR Ratings for OXY.

Suncor Energy (SU)

SU is a Canadian energy company that is primarily focused on developing petroleum resource basins in Canada’s oil sands. The company operates through four segments—Oil Sands; Exploration and Production; Refining and Marketing; and Corporate and Eliminations. It sells crude oil, natural gas, byproducts, refined products, and power.

SU’s total revenues and other income came in at C$16.20 billion ($12.47 billion) for the second quarter ended June 30, 2022, up 78.2% year-over-year. Its net earnings increased 360.4% year-over-year to C$4 billion ($3.08 billion). Moreover, the company’s EPS increased 387.9% year-over-year to $2.83.

The Street expects SU’s revenue to increase 45% year-over-year to $45.26 billion in 2022. Its EPS is estimated to increase 274.5% year-over-year to $7.60 in 2022. The stock has gained 39.2% year-to-date to close the last trading session at $34.83.

The POWR Ratings are also bullish on SU as it’s rated a B which equates to a Buy. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. B-rated stocks have posted an average annual performance of 21.0% which is significantly better than the S&P 500’s average annual performance of 8.0%. 

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OXY shares rose $0.08 (+0.12%) in after-hours trading Tuesday. Year-to-date, OXY has gained 122.26%, versus a -23.81% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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