If you hadn't noticed, the major refining stocks have been
taking it on the chin lately. But is this another buying
opportunity from Mr. Market -- or a sign of things to come?
Well, it might be a bit of both.
The key issue is that a slight change in the export law could
put serious pressure on refiners. (My colleague
Chuck Marvin touched on this in a recent
.) However, the market is treating refiner stocks as though this
law has already been changed -- but it hasn't.
The reward of owning the top refiners might well outweigh the
risk. Many of these refiners still offer solid dividend yields
and are compelling from a valuation standpoint.
For instance, consider a few of the nation's top refiners:
Valero Energy (NYSE:
Marathon Petroleum (NYSE:
Phillips 66 (NYSE:
. Share prices of all three are in the red over the last month,
while the S&P 500 Index is in the black:
Shares of all the refiners crumbled the other week when two
Pioneer Natural Resources (NYSE:
Enterprise Products Partners (NYSE:
, were given permission to export condensate. But the current ban
on crude oil exports is still intact.
Compared to unrefined crude oil, condensate is a refined
product. Hydrocarbon liquids produced in the U.S. must be
processed in the U.S. That's still the case -- so there's still
plenty of oil for the major refiners to refine. Let's take a
closer look at three of the biggest names.
The fourth-largest U.S. refiner by capacity, Phillips 66 has
15 refineries across the U.S. and stakes in refineries in Europe
and Asia. The beauty of Phillips 66 is it has invested heavily in
logistics and transportation, which allows its refineries to be
integrated with transportation and commercial operations. As a
result, Phillips 66 has some of the best margins and returns in
Back in May,
I highlighted PSX
as one of
favorite stocks. Shares were steadily moving higher until
tumbling the past couple of weeks. Its 2.3% dividend yield does
offer some downside protection.
Valero is the world's largest independent petroleum refiner
with 16 refineries. Its total refining capacity is upward of 1.9
million barrels a day. The majority of its oil travels through
the Mid-Continent to the Gulf Coast. The largest refiner on the
Gulf Coast, Valero should continue benefiting from the increased
supply of oil from the booming shale plays. The increased supply
and lower input costs should continue to be a key advantage for
Marathon Petroleum is the third-largest U.S. refiner, with
seven refineries and daily capacity of 1.7 million barrels.
Marathon has been focusing on the East Coast, which includes
connecting its Texas refineries to markets all over the
Valero is the cheapest refiner of the three on a
price-to-earnings (P/E) basis. VLO trades at a trailing P/E ratio
of 9.2, which compares favorably with PSX and MPC, which trade at
P/E's of 12.5 and 15.1. What's more, Valero is a great "
growth at a reasonable price
" (GARP) opportunity, with a P/E to growth (
) ratio of a mere 0.65. Phillips 66 has a PEG ratio of 1.5, while
Marathon's is 1.4.
Even though PSX trades with the highest P/E of the three, it
does so for a reason. Phillips 66 has the best return on assets
and net profit margin, coming in at 13.5% and 4%, respectively,
with each more than double its two peers.
Phillips 66 also has the highest dividend yield of the three
at 2.3%, compared with Valero at 1.7% and Marathon at 1.9%. All
three have similar debt-to-equity ratios, and all three have
enough cash on their balance sheet to cover over 10% of their
respective market caps.
Risks to Consider:
The biggest risk is that the U.S. government's approval of
condensate exports is a sign of things to come. If the government
decides to open up crude oil for export, that would decrease the
amount of oil available for U.S. refiners to process. A narrowing
of the Brent and West Texas Intermediate spread,
which we've seen recently
, could further squeeze refiner margins.
Action to Take -->
Buy Valero as one of the cheapest stocks in the refining
industry. If VLO traded closer to the industry average P/E of 15,
it could trade at upwards of $67 -- 36% higher than current
levels. Also, buy Phillips 66 as one of the industry's best
operators, a 2.3% dividend yield and an average analyst price
target of $90, which represents upside of 13%.
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