After the year-to-date move of over 25% each, we believe that the energy stocks Phillips 66 (NYSE: PSX) and Valero Energy (NYSE: VLO) are fully valued. PSX trades at a marginally higher valuation of 0.5x trailing revenues, compared to 0.4x for VLO. Although Phillips 66 has seen slightly better revenue growth, Valero is more profitable. The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. In the sections below, we discuss more about these energy stocks and their expected performance. We compare a slew of factors, such as historical revenue growth, returns, and valuation.
Firstly, looking at stock returns, PSX stock has seen extremely strong gains of 145% from levels of $70 in early January 2021 to around $170 now. Similarly, VLO stock also saw a stellar growth of 270% from levels of $50 to around $185 over the same period. This compares with an increase of about 40% for the S&P 500 over this roughly three-year period.
PSX and VLO are among a handful of stocks that have increased their value in each of the last three years, but that still wasn’t enough for it to consistently beat the market. Returns for PSX stock were 4% in 2021, 44% in 2022, and 28% in 2023, while VLO stock saw gains of 40% in 2021, 74% in 2022, and 2% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that PSX underperformed the S&P in 2021, and VLO underperformed the S&P in 2023.
In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Energy sector including XOM, CVX, and COP, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could PSX and VLO face a similar situation as they did in 2021 and 2023, respectively, and underperform the S&P over the next 12 months — or will they see a strong jump? We think that both stocks are fully valued now.
1. Phillips 66’s Revenue Growth Is Better
- Phillip 66’s revenue growth has been better, with a 32% growth since 2021, compared to 27% for Valero.
- The revenue growth for both companies can be attributed to higher crude oil prices, robust demand environment, and tight supplies.
- The WTI crude price has increased from levels of $75 in late 2021 to $87 now.
- However, 2023 saw sales decline for both companies, given lower crude oil prices. For perspective, the WTI crude oil price per barrel surged from around $75 in late 2021 to over $120 in June 2022, before falling to $71 in late December 2023.
- While Phillips 66’s sales were down 13% y-o-y in 2023, Valero’s revenue plunged 18%.
- Our Phillips 66 Revenue Comparison and Valero Energy Revenue Comparison dashboards have more details.
- The overall demand for oil remains robust and the International Energy Agency has recently raised its outlook for oil demand growth to 1.3 million barrels per day, from its prior outlook of 1.2 million barrels per day. This comes after a strong growth of 2.3 million barrels per day in 2023. [1]
- IEA also expects tighter supply, with extended production cuts by OPEC+ members. Furthermore, escalating geopolitical issues, including Ukraine and Russian attacks on refineries, and the Israel-Gaza conflict, may keep oil prices elevated in the near term. [2]
2. Valero Is More Profitable
- Valero’s operating margin has improved meaningfully from 1.9% in 2021 to 8.2% in 2023, while Phillips 66’s operating margin expanded from 0.4% to 5.4% over this period.
- Looking at the last twelve-month period, Valero’s operating margin of 8.2% fares better than 5.4% for Phillips 66.
- Although Phillips 66’s refining margin per barrel grew to $17.32 from $7.42 in 2021, it was much lower than $21.55 in 2022, due to the decline in fuel prices.
- Valero saw its overall refining margin decline by $4.4 billion y-o-y to $19.0 billion in 2023.
- Looking at financial risk, Valero fares better. Phillips 66’s 26.5% debt as a percentage of equity is higher than 20.9% for Valero. Furthermore, its 4.4% cash as a percentage of assets is lower than 8.6% for the latter, implying that Valero has a better debt position and more cash cushion.
3. The Net of It All
- We see that Phillips 66 has demonstrated better revenue growth. On the other hand, Valero is more profitable, and has a better financial position.
- Looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe both stocks are fully valued.
- Note that both stocks are trading at a higher valuation multiple vis-à-vis their historical average. While VLO stock currently trading at 0.4x trailing revenues vs. the last five-year average of 0.2x, PSX stock trades at 0.5x trailing revenues, vs. the last five-year average of 0.4x.
- Now, an upward revision to the valuation multiples appears justified, given the robust demand environment and tighter supplies for crude oil. However, after the recent uptick in both stocks, we think that positives are already priced in, and investors willing to enter are likely to be better off waiting for a dip.
While PSX and VLO appear fully valued, it is helpful to see how Phillips 66’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
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