J.P. Morgan Says Now Is the Time to Pull the Trigger on Energy Stocks; Here Are 2 Names to Consider
Stock Analysis & Ideas

J.P. Morgan Says Now Is the Time to Pull the Trigger on Energy Stocks; Here Are 2 Names to Consider

Sounding a note of musical irony, Van Morrison sang, “My Mama told me there’d be days like this.” And in an distinctly unironic note, top analysts may start saying the same thing. With rising inflation, rising interest rates, and a falling stock market, we’re in for more volatile days like this.

Looking at the big picture from JPMorgan, Dubravko Lakos-Bujas, the firm’s global head of equity macro research, notes the energy crisis – the natural gas shortages in Europe, the high price of oil world-wide, and the reduced global production. Second, points out how energy stocks as a sector are well-placed for gains going forward.

“With no resolution to the current energy crisis in sight, Energy sector remains in a particularly sweet spot with very attractive valuations, strong fundamentals and significant improvement in quality… The sector should deliver strong relative growth and rising capital return at very cheap valuation, while its balance sheet continues to strengthen. The sector’s strong fundamentals remain anchored to rising revenues and high profit margins,” Lakos-Bujas opined.

Against this backdrop, the JPMorgan stock analysts have picked up this thread, and followed it to the logical conclusion: pulling the trigger the energy stocks that they see as winners going forward. We’ve used TipRanks’ database to call up the latest details on two of these JPM energy picks; here they are, along with commentary from the analysts.

SM Energy Company (SM)

We’ll start with a Denver-based hydrocarbon exploration and production firm, SM Energy. SM has focused its operations on two core areas in five counties of the state of Texas, in the West Texas Midland Basin and in the South Texas Maverick Basin. The company has three rigs running in the Midland area, and 2 in the Maverick area; while that sounds decidedly modest, it’s important to remember that with horizontal drilling methods and fracking technology, a hydrocarbon company can leverage one well or rig for high production.

A look at the numbers will tell that story. SM saw total production in 2Q22 of 13.3 million barrels of oil equivalent (MMboe), or 146.6 thousand barrels of oil equivalent per day (Mboe/d). Of this, 46% was oil and the balance was natural gas and natural gas liquids. The company’s high production numbers drove a robust 76% year-over-year increase in revenues, which reached just over $992 million for the quarter.

The bottom line benefited, too. SM’s profits started taking off in the second half of 2021, and in 2Q22 reached a total of $323.5 million, or $2.19 per diluted common share. Year-over-year, the EPS was up dramatically, from just 1 cent in the year-ago quarter. SM’s strong revenues and earnings came along with record-level cash generation. The company generated $542.6 million in cash from operations, and saw a free cash flow of $276.6 million.

According to JPMorgan analyst Zach Parham, SM Energy is still at the beginning of good times for investors. Backing his view, he writes, “SM looks to keep its high-performing rigs and frac crews busy, which we think was viewed more favorably vs a raise driven solely by inflation. The incremental activity should provide operational momentum into 2023 and is in addition to ~20 Permian wells that will be TIL’d in early 2023 after being drilled and partially completed in 2022.”

“We continue to believe SM’s 2023 capital efficiency is underappreciated… We estimate that SM will generate $1.07 B of FCF in FY23 (24% FCF yield), and we expect that a significant portion of that FCF could be set to come back to shareholders,” the analyst added.

Parham doesn’t just write up an optimistic outlook; he backs it with an Overweight (i.e. Buy) rating on the shares and a $60 price target that implies a one-year upside potential of ~39% from current levels. (To watch Parham’s track record, click here)

Overall, SM holds a Moderate Buy rating from the analyst consensus, based on 6 Buys, and 1 Hold and Sell, each. The shares are priced at $43.26, and their $61.97 average target suggests a 43% one-year upside. (See SM stock forecast on TipRanks)

Valero Energy Corporation (VLO)

Next up is Valero Energy, one of the major players in the North American, Caribbean, and UK refined fuels market. Valero operates 15 refineries in the US, Canada and the UK, along with 11 ethanol plants and a 50 megawatt wind farm. Valero’s business operates in three segments, refining, ethanol, and renewable diesel. The company is the second largest corn ethanol producer on the global markets, and the world’s second largest producer of renewable diesel.

Valero’s profits and earnings were rising through 2020 and 2021, and really took off in 2Q22. The company reported $51.6 billion in revenues, up by 86% year-over-year, and diluted EPS made an even more impressive y/y jump, from 63 cents to $11.36. Adjusted net income attributable to stockholders totaled $4.6 billion for the quarter.

The company has been consistently returning funds to shareholders, with a dividend of 98 cents per common share. The quarterly dividend payment has been held steady at it current level for nearly three years, and its annualized rate of $3.92 per common share gives an above-average yield of 3.44%. Valero has a 9-year history of keeping reliable dividend payments.

In the eyes of JPMorgan analyst John Royall, Valero’s record of strong fuel production and reliable capital return are key points for investor consideration.

“VLO put up record results in 2Q, while management commentary suggests product market tightness will continue, driven by reduced post-pandemic refining capacity and little sign of demand weakness at the wholesale level (despite broader data suggesting otherwise). Management was bullish on fundamentals going forward and believes cracks will be structurally higher in the next economic cycle than in previous cycles…. We now model $2.2B in buybacks for 2H22 and $3B annually in 2023+,” Royall noted.

Royall goes on to give VLO shares an Overweight (i.e. Buy) rating, along with a $148 price target that indicates a 30% upside in the next 12 months. (To watch Royall’s track record, click here)

Overall, there are 13 recent analyst reviews on file for Valero Energy, including 11 Buys, 1 Hold, and 1 Sell, for a Strong Buy consensus rating. The stock’s current trading price is $113.82, and the $142.85 average price target implies a 25.5% one-year gain from that level. (See Valero stock forecast on TipRanks)

To find good ideas for energy stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.


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