Energy is leading the market. The Energy Select Sector SPDR Fund (NYSEArca: XLE) is up 63.8% for the year, while the S&P 500 is down nearly 17%.

There’s no mystery behind the energy sector’s strength right now: Diesel supply is at decade lows, with East Coast supplies dwindling to “code red” levels for the first time in years. Gasoline prices, on average, are up 10% nationwide from a year ago, despite the drawdowns from the U.S. Strategic Petroleum Reserve. And, thanks to Vladimir Putin’s continuing aggression in Ukraine, sanctions on Russia are getting even more strict.

XLE is the safe-haven play of choice right now, and that’s fine if a safe haven is all you’re looking for. The demand picture won’t change that anytime soon.

But, investors would be best off owning specific stocks in the energy sector that offer the offensive and defensive qualities needed to get through an extremely volatile time.

That’s what I’ve got picked out for you today – a stock that’s already come up 80%, but with even more upside ahead of it as a “tight supply” turns into a crisis. This company is in an incredibly strong position.

This Is One of America’s Top Transportation Fuel Producers
I’m talking about Valero Energy Corp. (NYSE: VLO). They recently reported a solid beat on third-quarter earnings; earnings per share came in at $7.14. Guidance was nothing less than inspiring right now; Valero’s bosses don’t see any demand slowdown in sight, which means no business slowdown. That bucks the trend of what we’re seeing in the global economy.

Demand for gasoline and diesel in Valero’s wholesale system is now well above pre-COVID pandemic levels The diesel market, especially, remains supply-constrained and Valero bosses don’t see that changing in the short-term, which will help margins remain high.

Right now, there is a deep-rooted supply problem, which will ensure that, even if demand starts to falter, prices won’t collapse. There is no short-term supply solution, aside from increasing production. That can’t be brought online instantly, because Valero is seeing a 95% utilization rate for its refining business.

On the natural gas front, still-elevated prices in Europe will also likely keep the floor for higher product margins versus pre-pandemic levels.

Valero Management Is Improving the Balance Sheet
The company is wading into these macroeconomic conditions sensibly; balance sheet reinforcement is a big focus. They ended the quarter with $4 billion in cash and no bond maturities until 2024, which puts them in a good position. Wall Street estimates high transportation fuel costs will help ensure free cash flow next quarter will be around $2.3 billion. This will help Valero to further reduce debt ($1.25B of debt repaid last quarter) without sacrificing liquidity, which means that its dividend of almost 3% could in fact increase from there.

The smart move here is to buy and hold VLO stock after its strong Q3 2022 company earnings. The company generated $44.45 billion in revenue, an increase of 50.6% versus the year earlier and expectations are that the company is in excellent financial condition.

During the earnings call, CEO Joe Gorder, came right out to explain why Valero in positioned well.

“Refining margins remain supported by strong product demand, low product inventories and continued energy cost advantages for US refineries compared to global competitors. Despite high refinery utilization rates, global product supply remains constrained due to roughly four million barrels per day of global refining capacity being taken permanently off-line since 2020 for a variety of reasons, including unfavorable economics or as part of planned conversions to produce low carbon fuels.”

Valero’s business and its strong-and-strengthening balance sheet make the company a buy in today’s market. This is a stock everyone ought to own as investors flee to energy and a diesel problem becomes a diesel nightmare.

— Money Morning Staff

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Source: Money Morning