Here's Why Hold Strategy is Apt for Valero Stock Now

Valero Energy Corporation VLO stands out as a premier oil refining company. Year to date, the company has gained 23.7%, outpacing the 7.3% improvement of the composite stocks belonging to the industry.

What's Favoring the Stock?

Valero, currently carrying a Zacks Rank #3 (Hold), is a best-in-class oil refiner involved in the production of fuels and products that can meet the demands of modern life. Its refineries are located across the United States, Canada and the U.K. A total of 15 petroleum refineries, wherein Valero has ownership interests, have a combined throughput capacity of 3.2 million barrels per day.

The Renewable Diesel business segment of the firm comprises Diamond Green Diesel ("DGD") — a joint venture between Darling Ingredients Inc. and Valero. DGD is a leading renewable fuel producer in North America. Low-carbon fuel policies across the globe are primarily aiding the demand for renewable diesel, therefore driving Valero's Renewable Diesel business unit.

Valero boasts that its premium refining operations are resilient, even when the business operating environment is carbon-constrained. Its refining business has the capabilities to generate handsome cashflows that will allow it to return capital to shareholders and back growth projects.

Risks

However, being a premium refiner, the firm's input costs are highly fluctuating, given the volatile pricing scenario of crude oil.

Stocks to Consider

Some better-ranked energy companies are Vitesse Energy Inc VTS, Chevron Corporation and SM Energy Company. Vitesse Energy sports a Zacks Rank #1 (Strong Buy), and SM Energy and Chevron carry a Zacks Rank #2 (Buy).

Vitesse Energy has non-operated working and mineral interests in oil and gas assets, mainly across the prolific Bakken in North Dakota. Having interests in 6,932 productive wells, Vitesse Energy has offered a solid production outlook, assuming that the crude pricing scenario will remain extremely favorable.

Chevron generates most of its earnings from its upstream operations. The integrated energy giant has a strong foothold in the Permian — the most prolific basin in the United States — where a significant portion of the energy major's acreage has minimum royalty payments. Thus, CVX will generate handsome cashflows through its upstream business, banking on handsome oil prices.

In addition to maintaining disciplined capital spending, Chevron has a strong balance sheet, providing a solid foundation to rely on during unfavorable energy market conditions.

To expand its premier asset portfolio, SM Energy recently agreed to acquire 80% of XCL Resources' oil and gas assets in the Uinta Basin for $2.04 billion. The value-driven acquisition, likely to close in September this year, will increase its inventory of net locations and boost its oil production. SM Energy is also committed to maintaining its strong balance sheet, which it can rely on during low oil prices.

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