The
Oil/Energy
space has continued to move higher this year after comfortably topping the S&P 500 leaderboard in 2021. It has generated a total return of more than 66% in 2022 compared with the S&P 500’s loss of 13.7%. Apart from a constructive demand picture, the sector is enjoying support from geopolitical uncertainty amid Russia’s military operations in Ukraine. In March, crude prices surged to multi-year highs of $130 on concerns about supplies from Russia, which is one of the world’s largest producers of the commodity. Naturally, there are some stocks that have been rocking since the start of the year and have strong earnings trends to back up the moves.
One such company is
Marathon Petroleum
MPC
. The Findlay, OH-based company is a leading independent refiner, transporter and marketer of petroleum products. MPC, in its current form, came into existence following the 2011 spin-off of Houston, TX-based Marathon Oil Corporation’s refining/sales business into a separate, independent and publicly-traded entity. It operates primarily in two segments: Refining and Marketing, and Pipeline Transportation (or Midstream).
Let’s discuss the reasons that make Marathon Petroleum an attractive pick:
Solid Rank and VGM Score
Marathon Petroleum is a Zacks Rank #1 (Strong Buy) stock in the Zacks
Oil and Gas – Refining & Marketing
industry, which carries a
Zacks Industry Rank
#5 — placing it in the top 2% of more than 250 Zacks industries. In addition to the favorable rank, MPC enjoys a Zacks Value Style Score of B, Growth of A, and Momentum of A to help it round out with a
VGM Score
of A. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best upside potential.
Estimate-Beating Recent Earnings
MPC posted robust Q1 results on May 3, with earnings per share of $1.49, comfortably beating the Zacks Consensus Estimate of $1.12 and turning around from a loss of 37 cents per share in the year-ago period. The company’s bottom line was favorably impacted by the stronger-than-expected performance of both segments. Precisely, operating income from the Refining & Marketing and the Midstream units totaled $768 million and $1.1 billion, respectively, ahead of their Zacks Consensus Estimate by 43.2% and 1.6%.
Shares at All-Time Highs
MPC shares have been on the move higher, adding 76.4% year to date to historic highs. The stock has been on a tear since bottoming out the COVID lows in the mid-to-high teens in March 2020. Since then, the stock has rallied along with the earnings projections. Now, a little over two years since bottoming out, the stock is over $110, closing yesterday at $112.87. With the company experiencing the best market conditions in years, we believe that Marathon Petroleum stock has enough firepower left to keep chugging along.
Image Source: Zacks Investment Research
Analyst Estimates Raised
MPC’s earnings revisions have also trended in the right direction over the last 60 days, as analysts have consistently taken up their numbers. As a matter of fact, the Zacks Consensus Estimate for Marathon Petroleum’s 2022 bottom line has gone up from a profit of $6.67 to $13.72 over the past 60 days, while next year’s number is a rise from $6.50 per share to $10.08.
Fundamental Strength
Marathon Petroleum’s $23.3 billion acquisition of Andeavor has integrated the premier assets of both the companies, bolstering the scale and leadership position of the combined entity in the United States. As it is, the company’s access to lower-cost crude in the Permian, Bakken and Canada helps it to benefit from the differentials. MPC’s portfolio of midstream operations bode well too, somewhat reducing its exposure to volatile commodity price fluctuations.
The industry’s improved fundamentals in the form of constrained supply and robust demand for refined products like gasoline have led to rising refining profitability for the players involved. In fact, gasoline prices in the United States have repeatedly soared to new record highs. As a reflection of this, Marathon Petroleum’s Refining & Marketing segment reported operating income of $768 million in the first quarter, turning around from the year-ago loss of $598 million.
Last year, Marathon Petroleum sold its Speedway business to Japanese retail group Seven & i Holdings – owner of the 7-Eleven convenience store chain – for $21 billion. Apart from providing Marathon Petroleum with a much-needed cash infusion, the disposal of its Speedway-branded gas stations came with a supply agreement per which Marathon Petroleum will supply about 7.7 billion gallons of gasoline per year to 7-Eleven thus ensuring a steady revenue stream.
Bottom Line
Given this backdrop, now appears to be a solid time to consider buying Marathon Petroleum. While there are some apprehensions that the company may have gotten too far ahead of itself, especially with the inflation-trigerred cost increases, the tightness in product demand should keep refining margins elevated moving forward. All these suggest strong long-term cash flows that should support higher price points for its shares.
Other Energy Stocks to Buy
Along with Marathon Petroleum, investors interested in the energy sector might look at
Equinor ASA
EQNR
,
Comstock Resources
CRK
and
Earthstone Energy
ESTE
, each carrying a Zacks Rank #1 (Strong Buy), currently.
You can see
the complete list of today’s Zacks #1 Rank stocks here
.
Equinor:
Equinor is valued at some $123 billion. The Zacks Consensus Estimate for EQNR’s 2022 earnings has been revised 15.1% upward over the past 60 days.
Equinor, headquartered in Stavanger, Norway, delivered a 1.9% beat in Q1. EQNR shares have surged around 64.5% in a year.
Earthstone Energy:
ESTE beat the Zacks Consensus Estimate for earnings in each of the last four quarters. The company has a trailing four-quarter earnings surprise of roughly 35%, on average.
Earthstone Energy is valued at around $2.4 billion. ESTE has seen its shares gain around 114% in a year.
Comstock Resources:
Comstock Resources is valued at some $5 billion. The Zacks Consensus Estimate for CRK’s 2022 earnings has been revised 44.2% upward over the past 60 days.
Comstock Resources, headquartered in Frisco, TX, has a trailing four-quarter earnings surprise of roughly 3.7%, on average. CRK shares have gained around 240.3% in a year.
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