Valero Energy Corporation VLO and Phillips 66 PSX are two large-cap energy players with promising business prospects, supported by their strong refining operations. Investors’ preference for both stocks is reflected in the price chart. Over the past year, VLO surged 149.2%, outperforming PSX’s 110.8% growth.
Image Source: Zacks Investment Research
However, the stock price performance does not necessarily establish VLO’s superiority over PSX as a refining energy giant. Before arriving at an investment conclusion, let’s examine the broader downstream business environment, which plays a crucial role in determining the cash flow potential of both energy majors.
VLO’s Advantageous Position in Heavy Crude Aids It
The Middle East tensions are driving crude oil prices higher, with West Texas Intermediate (“WTI”) hovering around $100 per barrel, according to Oilprice.com. The high crude price has significantly increased input costs for refiners such as VLO and PSX. However, unlike many refiners, Valero Energy has a heavy crude advantage, as heavy crude is cheaper than light crude like WTI.
Regarding the company’s access to diverse crude feedstocks, Valero has an advantage because its Gulf Coast refineries can buy crude oil from many low-cost sources, including the United States, Canada and Venezuela. This gives the company more flexibility to purchase cheaper oil, which helps keep refining costs low and can boost profits when competitors have fewer sourcing options.
Constrained Global Refining Capacity is a Boon for VLO & PSX?
Global refining capacity is constrained and fuel inventories are low. On the demand side, gasoline and diesel remain resilient. This means people are still driving, while diesel demand suggests transportation and freight activity are still holding up. As a result, with refineries busy and fuel in limited supply, refiners’ margins are quite strong.
With crude prices likely to remain high, investors shouldn’t allocate their money only to exploration and production companies but also to refining players like VLO, even though high crude prices have been increasing refiners’ input costs.
The same story applies to PSX, as the energy major also noted that there aren’t enough refineries or products globally right now because much refining capacity is offline and fuel inventories are low.
PSX’s Resilient Business Model & Debt Reduction Focus
Although a leading refiner, PSX, unlike most of its refining peers, has diversified its business across midstream and chemicals. Along with investing in refining operations, Phillips 66 is allocating significant capital to midstream.
The midstream business, by its very definition, is stable since the company generates stable cash flows as the assets are being utilized for the long term and is less vulnerable to commodity price volatility. Hence, with a diversified business model, PSX is largely insulated from commodity price volatility.
Moreover, debt reduction remains on track, with PSX targeting roughly $17 billion of total debt by 2026-end versus almost $21 billion in the second quarter, while net debt is expected to improve from $16.5 billion to less than $16 billion.
Image Source: Phillips 66
VLO or PSX: Which is a Better Stock?
Coming to the valuation, VLO stock is currently relatively cheap, as the energy company is trading at a trailing 12-month EV/EBITDA multiple of 9.00x, which is lower than PSX’s 12.52x. In other words, investors are willing to pay a premium price for PSX over VLO.
Image Source: Zacks Investment Research
The premium valuations reflect PSX’s strong business fundamentals, sound balance sheet and resilient business model. VLO also presents a compelling investment case, given its relatively attractive valuation and the prevailing strength in the refining business environment.
Currently, both stocks are highly investment-worthy and sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Valero Energy Corporation (VLO) : Free Stock Analysis Report
Phillips 66 (PSX) : Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
Source: finance.yahoo.com — article syndicated from the publisher’s feed; all rights remain with the original publisher.
