The energy industry includes stocks that are involved in the production or supply of energy. Companies engaged in oil and gas drilling, refining, and discovering and developing oil or gas reserves are all part of the energy sector or industry. The energy industry also comprises integrated power utility companies that use renewable energy and coal.
Energy companies continue to suffer challenges as oil supply exceeds demand. Oil prices have been below $70/barrel since early September. According to U.S. Bank Asset Management's senior investment strategy director, Rob Haworth:
"The oil market is one that remains well supplied but isn’t well demanded." Although the U.S. economy is strong, other major oil users like China and Germany are experiencing economic challenges. As a result, global demand is lagging.”
Nonetheless, a number of energy companies have made encouraging achievements in 2024, and investors have reaped financial rewards as the energy sector of the broader market has grown by 12.74% since the start of the year. Based on exceptional results in 2021 and 2022, it has increased by 19.89% in just three years and by 10.61% growth over the previous five years.
However, according to RSM’s Energy Outlook 2024 report, the North American energy sector will confront significant potential problems due to a global move toward renewable energy sources, aging infrastructure, and rising electricity consumption. Infrastructure limitations continue to be a major obstacle. Scalability concerns have been brought to light by record U.S. oil and natural gas output as well as a boom in renewable energy, affecting projects like solar farms in California and drilling in Texas. These challenges show how urgently infrastructure modernization investments are needed.
As per the aforementioned report, North America's demand for electricity has increased to levels not seen in many years. Emerging technologies like green hydrogen, the use of electric vehicles, and growing data centers are important drivers. The use of machine learning and other analytical AI technology is growing among energy companies. This change alters the energy sector and aligns with tax incentives and the company's environmental, social, and governance goals. Most importantly, integrating clean energy is essential as companies adjust to meet rising demand sustainably.
According to BloombergNEF, $303 billion was spent on U.S. renewable energy in 2023, a 22% increase from the year before, showing the continued pace of the energy transformation. Globally, $1.77 trillion was invested, signifying a strong push toward decarbonization. Even though renewable energy requires more cash, companies of all sizes—from startups to established oil and gas companies—are shifting their focus to renewables as the case for clean energy grows. This change sets up the energy industry for a significant and sustainable future.
Methodology:
We sifted through holdings of Energy ETFs and online rankings to form an initial list of 20 American Energy stocks. Then we selected the 10 stocks that were the most popular among institutional investors. The stocks are ranked in ascending order based on the number of hedge funds that have stakes in them, as per Insider Monkey's database of Q3 2024. We have used the stock's market cap as of November 21, 2024, as a tie-breaker in case two or more stocks have the same number of hedge funds invested.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter's strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
Massive storage tanks filled with crude oil and diesel fuels at an oil refinery.
In the US, Valero Energy Corporation (NYSE:VLO) is among the biggest independent refiners. It runs 15 refineries in the US, Canada, and the UK with a combined daily throughput capacity of 3.2 million barrels, making it one of the best American energy stocks. The company also has 12 ethanol plants with a combined capacity of 1.6 billion gallons per year and a 50% investment in Diamond Green Diesel, which can create 1.2 billion gallons of renewable diesel per year.
Valero Energy Corporation (NYSE:VLO) remains well-positioned for almost any market condition due to its high-quality refining assets and location, which allows for greater feedstock flexibility. Valero has always had an advantage because of its more efficient system of 15 refineries, which enables it to turn lower-quality feedstock into a high-value output. When domestic light crude discounts were available, it changed course and began processing larger quantities of high-quality discounted domestic crude by building more light crude processing capacity, investing in transportation infrastructure, and replacing imported crude with domestic.
Valero Energy Corporation (NYSE:VLO) produced $1.3 billion in operating cash flow and returned $907 million to shareholders in the third quarter, displaying a strong operational focus and a disciplined capital strategy. The Diamond Green Diesel SAF project's successful completion raises the possibility for future growth in renewable fuels.
Jason Gabelman has given the Valero Energy Corporation (NYSE:VLO) a Buy rating because of its ability to use its balance sheet during economic downturns to fund share buybacks, showing a strategic commitment to shareholder returns. Furthermore, even in difficult times, Valero's dedication to upholding a minimum payout ratio of 40-50% guarantees a steady return to investors.
Valero Energy Corporation (NYSE:VLO)'s mid-cycle free cash flow valuation, which uses 2026 as the terminal year, is still appealing. The optimistic outlook is further strengthened by the company's ability to increase buybacks if stock prices decline.
Steve Cohen's Point72 Asset Management was the largest stakeholder in the company from among the funds in Insider Monkey's database. It owns more than 1 million shares worth $137.02 million as of Q3.
Overall VLO ranks 8th on our list of the best American energy stocks to buy. While we acknowledge the potential for VLO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than VLO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
