It’s Not Too Late For These Undervalued Energy Stocks

Two Undervalued Energy Stocks With Fresh Upgrades 

The energy market has been in a correction along with the broader market-driven by fears of recession. While the fear of recession is not misplaced, the idea that oil prices are going to fall back anywhere the prepandemic level, or that demand will take a deep dive, is. What this means for investors is that energy stocks, especially the smaller, independent operators like Suncor Energy Inc and refiners like Valero Energy are trading at a deep discount with the expectation of robust revenue, cash flow, free cash flow, and capital returns. 

Suncor Energy, Inc Is A “Most Upgraded Stock” 

The Energy Sector has been the most upgraded sector this year and within that, Suncor Energy (TSE: SU) has been one of the most upgraded stocks and the upgrades are still rolling in. The most recent came in late June from Royal Bank of Canada which upped the stock to Outperform from Sector Perform and the sector, in our opinion, is set to outperform in 2022. In their view, after meeting with the company, the safety and reliability rating was on a predictably good path and warranted the upgrade. The new trajectory has the company on track to regain its ranking as the top oil-sands operator as well, which would be another catalyst for share prices. 

The new rating from RBC has the company’s consensus rating edging higher as well but it is still relatively low at Moderate Buy. The new price target is also putting upward pressure on the Marketbeat.com consensus target of $42 which implies about 25% of upside. RBC’s $53 is the new high price target as well but we think it won’t be the last. This company is slated to report earnings in early August and should be able to slide past the consensus despite the high bar set by the analysts. Regardless, the cash and cash flow are ample enough to support the 4.5% yield and the recent doubling of the buyback. 

High-Yield Valero Price Target Increased At Barclays 

Valero Energy Corporation (NYSE: VLO) pulled back along with the market and even got a downgrade to Neutral in June but that was an outlier. The remainder of analysts' activity in Valero Energy over the past year, including two very recent actions, are all bullish and have the Marketbeat.com consensus price target moving higher as well. The latest actions are price target increases from Barclays and Wells Fargo which have the consensus estimate at $129.50. The consensus estimate is about 25% above the current price and trending higher but that’s not the salient point. The salient point is that both new price targets are above the consensus and include the new high price target of $166 which adds another 28% to the upside potential. 

In addition to the low 6X earnings the stock trades for, Valero also pays a very healthy 3.70% dividend yield that is backed up by a rock-solid balance sheet. The added opportunity is the chance for a dividend increase. Valero hasn’t issued a dividend increase in several years but has a long history of increases prior to that. Assuming the cash and cash flow are even just as-expected we see a high potential for a dividend increase within the next few quarters. Based on the outlook for demand and refining margins we think the company will easily outperform its earnings estimates.