Energy stocks have suffered badly this year, largely due to the pandemic’s impact on global demand for oil consumption. One stock that fell hard since the Covid-19 pandemic emerged in March is Vivo Energy (LSE: VVO), a FTSE 250 company that has lost over 25% from the start of the year, and over 50% since 2018. But looking at the big picture, there are several reasons why I think the drop in price in Vivo Energy shares is actually a great long-term buying opportunity for me right now.
Energy sector rebound?
The energy sector has dropped by more than 50% in 2020 as the global demand for energy products has declined significantly. The drop in demand has been led by the coronavirus pandemic and the Russia-Saudi Arabia oil price war that resulted in a significant decline in oil prices during March-May. Nevertheless, in my opinion, the coronavirus pandemic seems to be calming down, in particular with the recent news that the Pfizer Covid-19 vaccine was found to be 90% effective. As such, the energy sector has made a mini-comeback since the bottom levels it was trading in late October.
Vivo Energy, which is a relatively new company founded in 2011 and has a market capitalisation of around £1.16bn, has also starting to gain momentum in the past two weeks. Since the bottom of 71p at the end of October, its shares have gained over 20% and, in my view, are poised to continue their strong rally.
Energy stocks are highly correlated to energy prices, global demand for oil and energy-related products, and to geopolitical issues. With the hopes that a vaccine for Covid-19 can keep pushing markets higher, and the recent change of guards in the US, I genuinely believe a direction change could potentially occur. Shares of Vivo Energy soared nearly 11% on the day of Pfizer’s announcement on expectations of upbeat economic projections.
One of the key reasons for the Vivo Energy share price rally has been the recent announcement to reinstate its 2019 final dividend after a strong recovery in Q3 earnings results. In late October, the British petroleum company said it was “encouraged by the resilient performance during the quarter”. In its Q3 update, Vivo Energy has also said that the strength of the balance sheet can be largely attributed to Vivo’s international bonds issue of $350mn maturing in 2027.
Vivo has also mentioned the recovery from the impact of the pandemic, with mobility restrictions easing in the majority of the markets it operates (Vivo Energy operates in 23 countries and 2250 retail sites).
The dividend resumption is a clear sign of recovery of profits and a strong balance sheet. Moreover, I believe it will be difficult to ignore any high-paying dividend yield stock like Vivo Energy that offers around 3% in times of near-zero interest rates.
Vivo Energy shares: the verdict
Vivo Energy, like most global energy stocks, struggled since the beginning of the year when energy prices plummeted. With that in mind, I believe the reasons above could be a strong catalyst for Vivo Energy shares to return to pre-Covid-19 levels, and even higher. The company’s shares have already gained nearly 20% since late October, and if this trend continues, I’ll consider buying shares of the company for my own portfolio before too long.
The post Cheap UK shares: is Vivo Energy worth buying right now? appeared first on The Motley Fool UK.
Tom Chen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020