Americans Are Driving This Summer Instead of Flying: 4 Stocks Could Be Big Winners

Energy

Published: July 21, 2020 7:17 am

Summertime always means one thing in the United States: summer vacation. This year is profoundly different around the nation due to the COVID-19 pandemic. Many Americans are afraid to get on an airplane, and with good reason given what we have experienced over the past six months. That lack of flying is adding up to a ton of driving.

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In a new research report, Jefferies has seen the numbers that American car drivers are putting up, especially with the price of gasoline still very reasonable in most states. The firm feels that there is some outstanding opportunity for investors looking to take advantage of the travel discrepancies and differences this summer. They noted this in the report:

Demand for gasoline has steadily rebounded, and meaningfully accelerated in recent weeks as states have reopened, vacationers have taken to the highways, and travelers have displayed a preference for driving vs. flying; in the Energy Information Agency’s last reading, gasoline demand was down just 6% year-over-year We adjust our forecasts for better expected second quarter operating rates, weaker cracks & muted capture; however, our second half market structure (demand-driven operating rate improvement checked by distillate inventory) is unchanged and supported by EIA data. Following sharp share price declines from June highs and with improving cracks, demand, and inventories, we upgrade four companies to Buy.

All four of the following stocks make sense for those looking for energy exposure but who remain wary of exploration and production companies.

Holly Energy Partners

This limited partnership owned by HollyFrontier, and it is a solid dividend play. Holly Energy Partners L.P. (NYSE: HEP) owns and operates petroleum product and crude pipelines, storage tanks, distribution terminals, loading rack facilities and refinery processing units that support the refining and marketing operations of HollyFrontier in West Texas, New Mexico, Utah, Nevada, Oklahoma, Wyoming, Kansas, Arizona, Idaho and Washington.

The company’s refined product pipelines transport conventional gasolines, reformulated gasolines and low-octane gasolines for oxygenate blending, as well as distillates, such as high- and low-sulfur diesel and jet fuels and liquefied petroleum gases. Its intermediate product pipelines transport intermediate feedstocks and crude oils; and its oil trunk, gathering and connection pipelines deliver crude oil.

Holly operates 26 main pipelines; crude gathering networks; 10 refined product terminals; a crude terminal; 31,800 track feet of rail storage; seven locations with truck or rail racks; and tankages at six refining facility locations, as well as five refinery processing units.

Holders of Holly Energy Partners stock receive an outstanding 10.46% distribution, which appears safe for now. The Jefferies analysts have a $17 price target on the shares, which compares with a higher $18 Wall Street consensus target, as well as Monday’s close at $13.38 per share.

Phillips 66

This extremely diversified energy company has a long and successful operating history. Phillips 66 (NYSE: PSX) operates through four segments: Midstream, Chemicals, Refining, and Marketing and Specialties. The company holds many of these assets within its master limited partnership, Phillips 66 Partners.

ALSO READ: Goldman Sachs Says US Onshoring From China May Be Huge: 5 Stocks to Buy Now

Phillips 66 is able to benefit from the tax-advantaged structure while still operating a more diversified operating business that also contains many assets that aren’t ideal master limited partnership assets, such as its fast-growing chemical manufacturing business and its super-profitable refined products marketing business. Note that this company has one of the highest paid CEOs in America.

Investors receive a very solid 5.78% dividend. The Jefferies price target is $73, but the consensus target is higher at $84.56. Phillips 66 stock closed Monday’s trading at $62.33 a share.

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Phillips 66 Partners

This is another top pick at Jefferies and may be one of the best total return plays for investors. Phillips 66 Partners L.P. (NYSE: PSXP) is a growth-oriented master limited partnership formed by Phillips 66 to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum product and natural gas liquids pipelines and terminals and other transportation and midstream assets.

The recent court ruling against the Dakota Access Pipeline hit the shares hard, and that could be offering investors an incredible entry point now. While the company’s distribution coverage by free cash flow could remain very weak in 2020, most Wall Street analysts feel comfortable with the shares. One big reason is that the company’s leverage is very moderate and should be able to handle the $631 million burden from a negative outcome from the Dakota Access Pipeline.

Shareholders receive a stunning 11.56% distribution, which also appears to be safe for now. The $36 Jefferies price objective is lower than the $45.36 consensus target price. Phillips 66 Partners stock closed most recently at $30.02 per share.

ALSO READ: 8 Blue Chip Stocks to Buy Ahead of Earnings for Big Upside

Valero Energy

This Wall Street favorite is a very solid energy play for more conservative balanced accounts. Valero Energy Corp. (NYSE: VLO) is one of the largest independent petroleum refining and marketing companies in the United States. It is based in San Antonio, Texas; owns 13 refineries in the United States, Canada and Europe; and has a total throughput capacity of around 2.5 million barrels per day.

Valero also is a joint venture partner in Diamond Green Diesel, which operates a renewable diesel plant in Norco, Louisiana. Diamond Green Diesel is North America’s largest biomass-based diesel plant.

Valero sells its products in the wholesale rack or bulk markets in the United States, Canada, the United Kingdom, Ireland and Latin America. Approximately 7,400 outlets carry Valero’s brand names.

Investors receive an outstanding 7.22% dividend. Jefferies has set a price target of $62. The other analysts again have set the consensus target higher at $73.17. Valero Energy stock was last seen trading at $54.33 a share.

These four top stocks have been absolutely crushed since June. They all pay solid dependable dividends, which again, at least for now, look safe and offer investors a way to play the energy sector with a much lower risk profile. For investors looking for growth and income, these may be outstanding portfolio additions.

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