Refinery Stocks Ride Trends To Better Margins

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Refinery stocks have been in a market sweet spot for some time.

IBD's Oil & Gas-Refining/Marketing industry group outperformed the Nasdaq and the S&P 500 in each of the past four years. So far this year, the group is up 18% vs. mid-single-digit gains for the major stock indexes.

Three things are currently helping refinery stocks .

First, no refinery has been built in the U.S. since 1976. Although existing refineries have expanded capacity sharply during that period, competition would be more intense if refineries had been added in the U.S.

So on balance, existing refineries and their profit margins benefit from the lack of construction.

Second, the spread between West Texas Intermediate and Brent crude oil also helps refiners. In intraday trade Tuesday, Brent was at $118.15 a barrel vs. $97.42 for WTI.

When U.S. refiners can get crude oil for processing at a huge discount to international prices, profit margins rise.

Third, the price of crude oil has stayed in a rolling range the past two years. The highs generally have been around $100 to $115 a barrel and the lows $75 to $85.

Since crude oil is a cost for refineries, low or stable oil prices are better for profits.

Two refinery stocks appeared in Tuesday's Big Cap 20 screen. Both pay dividends, and so they may be of interest to income investors.

Marathon Petroleum ( MPC ) reported a 6.5% pretax margin last year, up from the 1.5% to 3% range of the previous four years.

Earnings grew 45%, 273% and 46% in the past three years. However, the Street expects only 3% growth in 2013.

The current annualized dividend yield is 1.7%.

Pretax margin forPhillips 66 ( PSX ) was 4.4% last year, up from less than 1% in previous years.

EPS leapt 55%, 390% and 46% in the past three years. Analysts expect EPS to slide 11% this year.

The dividend yield is 1.9%.

The slower growth in 2013 appears to be tied to the law of big numbers. It's hard for a company to follow its own big growth.

Marathon and Phillips 66 are on the wild side in earnings stability. The five-year Stability Factor is a worst-possible 99 for both stocks.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance , Investing Ideas
Referenced Symbols: MPC , PSX

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