- Energy stocks (NYSE: ) will perform best in 2022
- Not only do they offer strong growth, but they also offer high dividend yields
- Conoco Philips, Marathon Petroleum and Valero Energy are particularly worth a closer look
Energy stocks have had a gigantic run this year. This was helped by the rebound in prices for and , both of which are near their all-time highs.
Not surprisingly, one of the top ETFs in the energy sector, the SPDR® S&P Oil & Gas Exploration & Production ETF (NYSE: ), is up 50% year-to-date. It fell by about 16% over the same period.
Assuming crude oil and gas prices remain high, I think these three energy stocks are well positioned to continue their uptrend at least through the end of the year given solid fundamentals, reasonable valuations and strong shareholder returns to continue.
- Price development in the current year: +54.7%
- Pro+ fair value upside: +31.7%
- Market cap: $140.3 billion
ConocoPhillips (NYSE: ) is one of the largest energy companies in the world, whose core business is the exploration and production of oil, natural gas and liquid natural gas.
The Houston, Texas-based energy producer’s shares are up about 55% in 2022. The reason: The company is benefiting enormously from increased production and high oil and gas prices.
On June 8, ConocoPhillips stock hit an all-time high of $124.08. The price has more than doubled year-on-year. This makes the company one of the absolute best in the sector over the past 12 months and the third most valuable US energy producer.
And there is no end in sight to this trend as ConocoPhillips should continue to perform well in the current challenging macroeconomic and geopolitical environment.
At a reasonable price-to-earnings (P/E) ratio of 8.8, COP is cheaper than Exxon Mobil (NYSE: ) and Chevron (NYSE: ) , which trade at 10.5 times and 10.7 times forwards, respectively earnings.
In addition, the company has taken steps to improve shareholder returns through one-off variable special dividends and share buybacks.
The energy giant recently announced a dividend of 46 cents per share for the third quarter and a cash payout of $1.40 per share for the fourth quarter. It also approved an increase in the planned return on capital in 2022 by US$5 billion to US$15 billion.
Most analysts are generally positive on COP with an average price target of $121.12.
It is even more gratifying InvestingPro determined average fair value of $145.53 has an earnings potential of about 31.7%.
- Price development in the current year: +58.6%
- Pro+ fair value upside: +48.6%
- Market cap: $50.5 billion
Marathon Petroleum (NYSE: ) has been a notable industry star this year, benefiting from rising global fuel demand and high prices. The acquisition of Andeavor in 2018 made the company the largest oil refining company in the United States.
Marathon beat earnings and revenue expectations in the second quarter, delivering its best results ever. For the year, the stock is already up nearly 59%, reaching an all-time high of $114.35 on June 8.
I think Marathon Petroleum is a solid company to own in this environment given its healthy balance sheet, strong cash flows and attractive valuation. MPC trades at a price-to-earnings ratio of about 6.0, which is about 20% below the sector median of 7.3, according to Investing Pro.
In addition, the refiner has been aggressively buying back shares to return capital to investors. As if that wasn’t enough, management recently approved a new $5 billion stock buyback program.
With compound annual dividend growth of 17% over the past 10 years, MPC currently offers an annual dividend of $2.32 with a yield of 2.21%.
Noisy Investment Pro the share has a fair value of approx. $151, which equates to an upside potential of 48.6% from the current price.
- Price development in the current year: +57.1%
- Pro+ fair value upside: +30%
- Market cap: $46.4 billion
Valero Energy (NYSE: ) is one of the largest refining companies in the United States. The San Antonio, Texas-based energy company’s stock has had a solid performance through the first eight months of 2022.
For example, VLO hit an all-time high of $146.80 on June 8 and is up about 57% year-over-year. In doing so, it has significantly outperformed the returns of and the S&P 500.
Despite the stock price gain, Valero continues to be an investment thanks to its efforts to return excess cash to shareholders as a result of its strengthened balance sheet and high margins.
The company delivered record earnings and revenue in the second quarter and offers a quarterly payout of $0.98 per share for an annualized yield of 3.18%.
Treasury yields are currently around 3% and the implied yield for the S&P 500 is around 1.5%.
Additionally, VLO has a relatively low price-to-earnings (P/E) ratio of 6.6 — at least compared to other well-known companies such as Valvoline (NYSE: ).
According to the evaluation models of InvestingPro Valero could gain 30% from the current price.
For my part, I expect further price gains at Valero. With sound fundamentals, the company should not only be able to grow earnings and free cash flow, but also increase returns to shareholders.
Disclaimer: Jesse is currently invested in XOP and VLO. The views expressed in this article are solely those of the author and should not be construed as investment advice.