Energy has been one of the worst-performing sectors in the
S&P 500 during the pastyear .
While the broadermarket is up an impressive 13%, the energy
sector has gained just 2.5%. That performance looks even worse
when compared with themarket 's mostbullish sectors, with health
care up 29% and so-called consumer defensivestocks (which include
makers and retailers of food and household and personal goods) up
But overall weakness in energy stocks is masking a lone group
of standouts from the lackluster sector: refineries.
In fact, this group of stocks hasn't just been strong relative
to its energy peers -- it has been one of the best-performing
industries in the entire market in the past year. Take a look at
the chart of two leading companies.
This growth is being driven by a phenomenon known as the
The crack spread is theprofit a refiner can expect to
realize from converting a barrel of oil into gasoline. This
spread has been extremely profitable in the past year because
of a profound divergence in the price of Brent crude from
Norway and West Texas Intermediate crude.
Historically, the spread for a barrel of crude oil between
Brent and West Texas Intermediate has been only $1 to $3.
But in the past few years, increasing domestic crude
production and falling demand in the slow-growingeconomy has
lifted that spread to record levels, with Brent at $110 a
barrel and West Texas Intermediate crude trading at just
And with gasoline prices at the pump tied to Brent, it has
become incredibly profitable for domestic refiners to use
West Texas Intermediate crude as feedstock to produce
gasoline. As it stands, that trend is showing little sign of
slowing. These are the kind of natural resourceinvestment
opportunities you'll find in Nathan Slaughter's
Scarcity and Real
That's because the United States is continuing to ramp up
crude production amid a slow-growth economy, with daily
production projected to top 8 million barrels a day by the
end of 2014, a 16% increase from 2012. And with limited
pipeline and infrastructure to feed that West Texas
Intermediate crude to the rest of the world, the domestic
supplywill remain swollen for years to come. That's means
there is still plenty of time tocash in on refiners.
Here is a list of six leading refiners with their market
caps and forward price-to-earnings (P/E ) ratios.
From the group, I have chosen to highlight
Western Refining (
because of its proprietary access to pipelines and
Valero Energy (
for its dominant market position.
This is the smallest company on the list, with amarket cap
of just over $3 billion.
In addition to refining, Western also has wholesale and
retail operations to provide some mix ofrevenue streams. One
of the company's biggest weapons is its proprietary access to
pipelines, enabling it to control the supply of West Texas
Intermediate crude being shipped to its competitors. Western
has also begun cutting costs to improve margins, closing old
refineries and consolidating others. The company recently
raised itsdividend by 50%, to 12 cents a share, and now
carries adividend yield of 1.4%.
But in spite of all that good news, Western's forward P/E
ratio of 7 is a discount to its peer average of 9.
Valero is one of the largest refiners in North America,
with 14 refineries across the United States, Canada and the
Caribbean capable of producing 2.8 million barrels per day.
That hasput Valero in the perfect position to cash in on the
crack spread, withshares surging more than 64% in the past
To further streamline the company's business, Valero
recently announced its intent to spin off its retail unit, CST
Brands. The spinoff is expected to close in the second quarter
of 2013 and further unlock the core value of Valero's powerful
refining operations. With a forward P/E ratio of 8, Valero
trades at a discount to its peer average of 9 and the S&P
Risks to Consider:
Better domestic infrastructure for the distribution and
consumption of refined energy products would strengthen West
Texas Intermediate crude prices and tighten the spread with
Brent. A stronger domestic economy would also fuel more demand
for West Texas Intermediate crude, also tightening the spread
Action to Take -->
The crack spread is enabling refiners to log record profits.
That dynamic is in position to continue due to regional
productionfactors . That means it's still a great time to buy
refiners. My two favorite stocks from the group are Western
Refining because of its proprietary access to pipelines and
Valero Energy because of its dominant market position.
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