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Phillips 66 or Valero Energy: Which Stock Is The Better Energy Play?

Stocks in the energy sector have been clobbered this year due to the COVID-19 pandemic. Oil and gas prices plunged as the pandemic crushed demand in transportation and other end markets due to lockdowns and social distancing restrictions. The situation was so bad that the West Texas Intermediate, which is the US oil benchmark, went into negative price territory for the first time in history in April.

With the reopening of the economy and the favorable updates related to the development of COVID-19 vaccines by Pfizer/BioNTech and Moderna, there are hopes of recovery in the energy sector.

Bearing this extremely challenging business environment in mind, we will use the TipRanks Stock Comparison tool to place Phillips 66 and Valero Energy alongside each other and pick the stock that offers a more compelling investment opportunity.    

Phillips 66 (PSX)

Phillips 66 is a leading refining company that refines crude oil into petroleum products like gasoline and aviation fuels at its 13 refineries in the US and Europe. It also has a presence in the midstream space through Phillips 66 Partners (the company’s master limited partnership or MLP) and a 50% stake in DCP Midstream. Moreover, Phillips 66 has a 50% stake in CPChem, which sells petrochemicals and plastics and the company is also involved in the resale and marketing of refined petroleum products and the manufacturing and sale of specialty products like lubricants.  

The company posted an adjusted loss of $324 million in 2Q followed by an adjusted loss of $1 million in 3Q as the COVID-19 led disruption significantly impacted the demand for gasoline and jet fuel. The bottom line improved in 3Q as the company saw better conditions for its midstream, chemicals and marketing businesses while the refining business continued to be hurt by weak margins.

Within the refining business, the crude utilization rate was 77% in 3Q20, indicating an improvement from 75% in 2Q20. Also, realized margins were down 32% year-over-year to $1.78 per barrel. Overall, Phillips 66 delivered an adjusted net income of just $125 million in the first nine months of 2020 compared to $2.97 billion in the first nine months of last year. (See PSX stock analysis on TipRanks)

Meanwhile, Phillips 66’s debt has increased amid the pandemic but it still has a strong balance sheet and investment-grade credit rating. It is well-positioned to sail through this crisis compared to many of its peers. In response to the pandemic, the company reduced its 2020 capital spending by over $700 million and brought down its costs by more than $500 million. It also suspended its share repurchases and dividend increases, though it continues to pay dividends.

Looking ahead, Phillips 66 is seeking growth in the renewable energy space and has announced Rodeo Renewed, a project to convert its San Francisco Refinery into the world’s largest renewable fuels plant. It has also been investing in several growth projects including Sweeny Hub fractionators.

On Nov. 5, Wolfe Research analyst Sam Margolin upgraded Phillips 66 to Buy from Hold with a price target of $63, saying, “Analysts frequently characterize PSX as ‘defensive’, but this does not quite do justice to the story. PSX is a blue-chip company with a strong operating track record that was differentiated from peers by its growth outlook before the crisis.”

Margolin added, “Growth opportunity was impaired by pressure on the O&G [oil and gas] ecosystem but now nearing 2021 PSX is priced as a deep value play. As society gradually returns to normal, PSX is how you play offense.”

The Street mirrors Margolin’s optimism, with a Strong Buy analyst consensus based on 11 unanimous Buys. With shares plunging 43.8% year-to-date, the average price target of $65 indicates an upside potential of 3.8% in the months ahead.

Valero Energy (VLO)

Valero Energy is a leading independent refiner with 15 petroleum refineries in the US, Canada and the UK. It is also one of the world’s largest corn ethanol producers with 14 ethanol plants in the US. Through its Diamond Green Diesel joint venture with Darling Ingredients, Valero is rapidly growing in the renewable diesel segment.

Like other refiners, Valero has also been posting huge losses as the COVID-19 pandemic ravaged the demand for fuel products. The company’s adjusted loss was $504 million in 2Q20 and $472 million in 3Q20, bringing the total adjusted loss in the first nine months of 2020 to $836 million, compared to an adjusted income of $1.49 billion in the first nine months of 2019.

However, Valero disclosed that it experienced demand recovery in the third quarter with the easing of lockdown restrictions. Refinery capacity utilization improved to 80% in 3Q20 compared to 74% in 2Q20, but it was still below pre-pandemic levels.  

On the brighter side, the company’s renewable diesel business delivered a reported operating income of $184 million in 3Q20, reflecting a 183% year-over-year rise. Also, the ethanol segment flipped to a reported operating income of $22 million in 3Q20 compared to an operating loss of $43 million in 3Q19, driven by higher margin due to lower corn prices.

Meanwhile, Valero Energy has been aggressively expanding its renewable diesel business. The company has allocated 40% of its $2 billion planned capital investments in 2020 and 2021 to growth projects, and of this, 40% is dedicated to the expansion of the renewable diesel business. (See VLO stock analysis on TipRanks)

Last week, Piper Sandler analyst Ryan Todd lowered his price target on Valero to $66 from $78 but maintained a Buy rating. The analyst stated that despite near-term headwinds through the first half of next year on a potential pandemic-driven pullback in demand, improved visibility on the recovery from vaccine readiness and refinery closures makes him “cautiously optimistic” on the outlook for refiners in the second half of 2021.

The Street also has a cautiously optimistic outlook on Valero Energy. A Moderate Buy analyst consensus is based on 8 Buys, 1 Hold and 1 Sell. The average price target stands at $53.40, reflecting a possible downside of 4.1% over the coming year. Shares have already tanked 40.6% so far in 2020.  

Bottom line

With their plummeting stock prices, Phillips 66 and Valero Energy have a dividend yield of 6.13% and 7.7%, respectively. Overall, a strong balance sheet, a more diversified business model, the Street’s bullish sentiment and better chances of recovery in the stock make Phillips 66 a more favorable pick than Valero Energy.    

To find good ideas for 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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