Since Russia invaded Ukraine, we have been hit by the inevitable spike in fuel prices which has lightened our pockets. A limited supply from Russia, one of the world’s largest oil exporters, and a possible supply cutoff from Ukraine, another major oil exporter, have led to soaring fuel prices , which also strongly contributed to aggravate inflationary pressures across the world. Mondial economy.
In the field of fuels, the increase in the price of diesel is another subject that is much talked about. Understandably, diesel fuel prices have been on an upward trend alongside the recovery of the broader oil and gas sector.
The US Energy Information Administration noted that average prices for ultra-low sulfur diesel in the US rose more than 37% in the weeks following the start of the Russian-Ukrainian war, to a record high. $5.62 per gallon on May 9.
Additionally, the threat of diesel supply disruptions, particularly on the East Coast, is a serious concern for the market and the US government. The Biden administration has hinted it could release diesel reserves, if needed, to try to calm soaring prices and fears of a supply disruption.
It is difficult to say how long this rally in diesel prices will last, given the multiple factors influencing the price increase. However, this could be a great opportunity for investors looking to the oil and gas sector to take advantage of the uptrend while it lasts.
The success of a title in this sector does not only depend on favorable external winds. On the contrary, strong fundamentals, cash flow and prospects beyond near-term highs make a company worth investing in, both short-term and long-term.
The next two stocks look very well positioned to make the most of this growth spurt and possibly maintain the long-term momentum as well.
Suncor produces synthetic crude from the 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 abroad.
Suncor is among those who have benefited from soaring oil prices this year. SU stock has gained 36% in the past three months, easily outpacing the S&P 500’s 8% loss (SPX) in the same time frame.
Although oil sands mining projects involve huge start-up costs, maintenance costs drop dramatically once the project starts. Additionally, the life of oil sands projects is significantly longer than that of other traditional extraction methods like oil wells, allowing for sustainable opportunities for cost control.
Suncor’s dividend-generating capabilities are also noteworthy. Earlier this month, the company raised its dividend by 12% to the highest level in its history, after profits more than tripled in the first quarter.
The company’s annualized dividend yield is currently 3.7%, which is impressive for investors, at least during choppy times like these when capital gains are hard to come by.
Additionally, the scrutiny Suncor faces from activist investors regarding its operational and financial performance should push the company to improve its issues in order to salvage its reputation.
It is important to note that despite growing advocacy for clean energy that is expected to slowly move the sector away from fossil fuels, change will not happen overnight. This gives Suncor plenty of time to continue generating sustainable cash flow for at least a few decades.
Earlier this month, after announcing its dividend hike, Raymond James analyst George Huang reiterated a buy rating on Suncor and raised his price target from C$50 to C$52. .
Wall Street is fairly optimistic about the company’s outlook, with a Moderate Buy consensus rating based on eight buys and three takes. Suncor’s average price projection is $40.98, implying 4% upside potential.
The main US oil refinery Valero manufactures and markets transportation fuels and other petrochemicals.
Valero’s diverse base of refineries, spread across the United States, Canada and the Caribbean, sets it apart from any independent refiner.
Additionally, the company is the second-largest producer of renewable fuels, including ethanol and renewable diesel, giving it huge leeway to stay relevant and grow. Notably, Valero makes huge profits from the crack spreads and barrels of crude that pass through its facilities.
Additionally, fixed costs are relatively stable for downstream sectors, leaving plenty of room to refine stocks like Valero to increase their cash flow.
On May 23, Piper Sandler analyst Ryan Todd reiterated a buy rating on VLO stock and raised the stock price target to $135 from $121. Todd thinks there are more “legs” in refining investments than the market predicts.
Also, days before Todd’s report, JPMorgan analyst Phil Gresh raised his estimates for Valero’s refining unit. He reiterated a buy rating on the stock and raised the price target to $142 from $111.
Valero has a Strong Buy consensus rating based on 12 buys and one hold. Nonetheless, the average price target for VLO is $122.23, implying a downside potential of 4%.
With rising inflation showing no signs of stopping, consumers are widely expected to earmark most of their money for essential spending rather than discretionary spending. Fuels like petrol and diesel are considered essential as people will still need to get to and from work.
In addition, trade with Russia may be limited for a long time because of the war it has waged against Ukraine. This should keep oil prices up, at least in the short to medium term. Other than that, given Suncor’s and Valero’s fundamental strengths, both companies should continue to capitalize on current and future opportunities.
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