Plenty More Upside Ahead For These 3 Energy Stocks Through Year-End

Energy stocks have been on a tear this year, boosted by a rally in crude oil and natural gas prices, which are both trading near their best levels in years.

Oil and Gas Monthly

Not surprisingly, one of the energy sector’s main ETFs, the SPDR® S&P Oil & Gas Exploration & Production ETF (NYSE:XOP), has rallied 50% year-to-date (ytd). The S&P 500 is down roughly 16% over the same timeframe.

XOP and S&P 500 Daily

Crude and gas prices are set to remain strong so I think these three energy stocks are well-positioned to extend their march higher until the end of the year due to solid fundamentals, reasonable valuations, and high shareholder returns.

ConocoPhillips

• Year-To-Date Performance: +54.7%
• Pro+ Fair Value Upside: +31.7%
• Market Cap: $140.3 billion

ConocoPhillips (NYSE:COP) is one of the world’s largest energy companies. Its core business involves exploring and producing petroleum, natural gas and liquified natural gas.

Shares of the Houston, Texas-based energy producer have soared roughly 55% in 2022 as it benefits from increased output and high oil and gas prices.

ConocoPhillips’ stock rose to a record peak of $124.08 on June 8 and it is up 100% year-on-year (yoy), making it one of the sector’s top performers over the last 12 months and the third most valuable US energy producer.

COP Daily

ConocoPhillips is set to extend its march higher as it should perform well in challenging macroeconomic and geopolitical environments.

With a reasonable price-to-earnings (P/E) ratio of 8.8, COP is cheaper than Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), which trade at 10.5 times and 10.7 times forward earnings, respectively.

It has also taken steps to increase shareholder returns through special one-time variable dividends as well as stock buybacks.

The energy giant recently announced a third-quarter dividend of 46 cents per share and a Q4 variable return cash payment of $1.40 a share. It also authorized a $5 billion increase in planned 2022 return of capital to $15 billion.

Most analysts remain generally bullish on COP with an average price target of $121.12.

COP Consensus Estimates

Even more promising, the average fair value on Investing Pro of $145.53 implies around 31.7% upside.

Marathon Petroleum

• Year-To-Date Performance: +58.6%
• Pro+ Fair Value Upside: +48.6%
• Market Cap: $50.5 billion

Marathon Petroleum (NYSE:MPC) has been a standout performer in the sector this year, reaping the benefits of soaring global fuel demand, and strong prices. It became the largest petroleum refinery operator in the US following its acquisition of Andeavor in 2018.

Marathon delivered Q2 profits and revenue which blew past expectations to reach their highest levels on record. The shares have gained almost 59% ytd and touched an all-time high of $114.35 on June 8.

MPC Daily

In my view, Marathon Petroleum’s healthy balance sheet, strong cash flows, and attractive valuation make it a solid name to own. MPC trades at a P/E ratio of around 6.0, which according to Investing Pro, is about 20% lower than the sector median of 7.3.

Additionally, the oil refiner has been aggressively buying back shares in an effort to return capital to investors and management recently approved a new $5 billion share repurchase program.

Having delivered an average annual growth of 17% in its dividend over the last 10 years, it currently offers an annualized dividend of $2.32 at a yield of 2.21%.

MPC Fair Value

According to Investing Pro, MPC stock has a fair value of approximately $151, a gain of 48.6% from the current market value.

Valero Energy

• Year-To-Date Performance: +57.1%
• Pro+ Fair Value Upside: +30%
• Market Cap: $46.4 billion

Valero Energy (NYSE:VLO) is one of the largest refinery companies in the US. Shares of the San Antonio, Texas-based energy firm have thrived throughout the first eight months of 2022.

VLO stock, which reached an all-time high of $146.80 on June 8, is up approximately 57% ytd, easily outpacing the returns of the Dow Jones Industrial Average and the S&P 500.

VLO Daily

Despite its performance, Valero is worth owning due to its efforts to return excess cash to shareholders from its improving balance sheet and sky-high margins.

The company posted record profit and revenue in Q2 and offers a quarterly payout of $0.98 per share which implies an annualized yield of 3.18%.

The yield on the benchmark US 10-year Treasury is at around 3% and the implied yield for the S&P 500 is about 1.5%.

VLO also has a relatively low P/E of 6.6, compared to other notable names including Valvoline (NYSE:VVV).

According to Investing Pro, Valero stock could potentially see 30% upside from its current market value.

VLO Fair Value

I believe Valero is poised for further gains as its strong fundamentals will help fuel growth in earnings and free cash flow, allowing it to maintain its focus on shareholder returns.

Disclaimer: At the time of writing, Jesse had a position in XOP and VLO shares. The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.