Stock Analysis & Ideas

Diesel Shortage is Firing Up Diesel Stocks; SU and VLO on the Rise

Story Highlights

Diesel prices have been shooting up for various reasons, including diminishing supply, limited refineries, and ballooning demand. While consumers won’t be benefiting from high diesel prices, diesel stocks like Suncor and Valero most likely will.

There is a lot of noise around how volatile gas prices are as the Russia-Ukraine war continues into the winter. However, one of the areas of the oil sector that needs attention right now is diesel. Amid burgeoning demand, tight supply, and inflating prices, Suncor Energy (NYSE: SU) (TSE: SU) and Valero Energy (NYSE: VLO) are two diesel stocks that stand to ride the wave.

Diesel prices have been rising more steadily than gasoline as supplies dwindle. In the U.S., stockpiles of diesel are running dangerously low. Being short on refining capacity, diesel supply is being gravely impacted in the country.

Interestingly, Middle Eastern cargoes carrying diesel toward Europe were recently reported to be changing courses mid-way toward American coasts. Europe is also suffering from a diesel supply shock and has been importing a lot of diesel from the U.S. However, many refineries in the U.S. have shut down in the past two years due to the pandemic and other factors. So, the low supplies in the U.S. are not efficiently being addressed, which might soon lead to a ban on U.S. diesel exports (most likely before the midterm elections in November).

All these have only added fuel to the fire of rising diesel prices (pun intended). The increase in prices is expected to continue some more and should benefit companies such as Suncor Energy and Valero Energy.

Suncor Energy (NYSE: SU) (TSE: SU)

Suncor produces synthetic crude from oil sands, which is quite different from conventional oil production. The company is also involved in the exploration, acquisition, development, production, and marketing of crude oil in Canada and internationally.

The company is among those that have been benefiting this year from burgeoning oil prices. SU stock has gained 35.7% year-to-date.

Suncor’s dividend-generating capabilities are also noteworthy. In May, the company hiked its dividend by 12%, reaching the highest level in its history, after its profits increased more than three times in the first quarter.

The company’s dividend yield is 4.2% currently, meaning 4.2% of share prices are paid to shareholders as dividends, which is impressive for investors, at least during choppy times like these when capital gains are hard to achieve.

Importantly, despite the growing advocacy for clean energy that is expected to slowly transition the sector away from fossil fuels, the change will take time. Currently, key sectors are running on diesel, especially the logistics domain. This gives Suncor ample time to keep generating sustainable cash flows for at least a few decades.

Is Suncor Stock a Buy or Sell, According to Analysts?

Wall Street is fairly optimistic about the company’s prospects, with a Moderate Buy consensus rating based on seven Buys and five Holds. The average price target of $39.82 indicates that Suncor stock has the potential to increase by about 17.15% over the next 12 months.

Valero Energy (NYSE: VLO)

Leading American oil refinery Valero manufactures and markets transportation fuels and other petrochemical products. The company’s shares have risen 69% year-to-date.

Valero’s diversified refinery base, located throughout the United States, Canada, and the Caribbean, makes it stand out among all independent refiners.

Moreover, the company is the second-largest producer of renewable fuels, including ethanol and renewable diesel, allowing it to grow and stay relevant. Notably, Valero makes huge profits from crack spreads and crude barrels that travel through its facilities.

Additionally, fixed costs are relatively stable for downstream sectors, giving plenty of room for refining stocks like Valero to scale their cash flows.

The company is working on key projects that aim to increase the refinery’s throughput capacity by the first half of 2023.

Is Valero Stock a Buy or Sell, According to Analysts?

Wall Street analyst consensus is bullish on Valero stock with a Strong Buy rating based on 12 unanimous Buys. The average price target is $146.33, indicating a 15.4% upside potential from current price levels.

Conclusion: Both Companies Can Keep Thriving

With inflation out of hand, consumers are largely expected to reserve most of their money for essentials rather than discretionary spending. Fuel like petrol and diesel are considered essential, as people will continue to need to commute and businesses will continue to transport and ship goods. Apart from this, bearing in mind the fundamental strengths of Suncor and Valero, both companies are expected to keep capitalizing on the current opportunities and those that lay ahead.


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