Markets
VLO

3 Refining Stocks to Buy as Crude Hits 6-Year Low - Analyst Blog

A generic image of coins in front of a stock chart.
Credit: Shutterstock photo

After a short recovery, crude price is again witnessing a free fall. More importantly, there is almost no hope of immediate oil price recovery. It seems that investors should reallocate their hard-earned money from the oil and gas industry to other stable sectors. But we are happy to say that the scenario is not as scary as one might think as refiners are expected to beat the market after reducing their input cost.

Crude Nosedives Again

Subsequent to a prolonged period of plunging oil prices , West Texas Intermediate (WTI) crude started to trade slightly above $50 per barrel with a small hope of recovery. However, the rally did not sustain. Oil prices again broke the $45 a barrel threshold to touch the six-year low of $43.88 a barrel. This was due to a significant increase in supply of the commodity in the U.S and Libya.

As per the Energy Information Administration (EIA) - which provides official energy statistics from the U.S. government - crude commercial inventory in the U.S increased by 4.5 million barrels to 448.9 million barrels in the week ending Mar 6. This marks the 9 th consecutive week of oil stock increase. In Libya, crude production has almost doubled to 490,000 barrels per day as compared to data a few weeks ago, according to media releases.

Hence, we can say that crude supply in the U.S. and in the global market is plentiful.

On top of that, EIA in its latest update, made an upward revision in its 2015 production projection. This implies that domestic crude output in 2015 is expected to increase to 9.35 million barrels per day (bbl/d), slightly above the previous guidance of 9.3 million bbl/d. (Read our blog: Crude Production Grows Despite Best Efforts, Woes Remain )

Iran too is expected to hike its crude export considerably once U.S. removes all the sanctions against Tehran, the capital of the country. The U.S. is now almost close to a nuclear deal with Iran. The announcements indicate that there is no immediate oil price recovery.

Who Will Gain?

The business of the refining players is negatively correlated with crude prices. This is because the companies use oil as an input from which they derive refined petroleum products like gasoline - the prime transportation fuel in the U.S. Hence, lower the oil price, higher will be their profits.

We can say that the decline in crude price, which is expected to continue for some time, will bring more good news for the firms engaged in refining oil.

Investors should notice that most of the oil refining firms' fourth-quarter 2014 earnings surpassed the Zacks Consensus Estimate. Higher refining margins for weak crude prices led to the improvement.

3 Prominent Picks

Given that the primary business of refining players is likely to outperform the broader U.S. equity market owing to the drastic fall in crude prices (i.e. input costs), it would be a wise decision to include top-ranked stocks − in this space - in your portfolio. These stocks include:

Valero Energy CorporationVLO

San Antonio, TX-based Valero Energy is the largest independent refiner and marketer of petroleum products in the U.S. It has a refining capacity of 2.9 million barrels per day (Bbl/d) across 15 refineries located throughout the U.S., Canada and the Caribbean.

On Jan 29, the company posted strong fourth-quarter 2014 earnings of $1.83 per share, which surpassed the Zacks Consensus Estimate of $1.21. The quarterly earnings also compared favorably with the year-ago adjusted earnings of $1.78 per share. The growth was mainly backed by higher refining throughput margins and lower refining operating expenses. (Read our blog: Valero Beats on Q4 & Full Year Earnings, Revenues )

Valero Energy currently carries a Zacks Rank #2 (Buy), implying that it will outperform the broader U.S. equity market over the next one to three months.

Marathon Petroleum CorporationMPC

Findlay, OH-based Marathon Petroleum is the fourth largest domestic refiner with a combined crude oil processing capacity of approximately 1.7 million Bbl/d through its portfolio of seven refineries. A major advantage for this Zacks Ranked #2 company is its proprietary access to pipelines, which inhibits lower-cost competitors from supplying Marathon Petroleum's key markets.

Last month, Marathon Petroleum reported strong fourth-quarter results, owing to higher product price realization and increased contribution from the Speedway segment. The company announced earnings per share of $2.86, which surpassed the Zacks Consensus Estimate of $1.47. The bottom line also improved from the year-ago period adjusted profit of $2.10. (Read our blog: Marathon Petroleum Beats on Q4 Earnings, Revenues )

Western Refining Inc.WNR

El Paso, TX-based Western Refining is one the largest independent oil refiners in the U.S. with a combined crude oil processing capacity of approximately 153,000 Bbl/d. A major advantage for the company is its proprietary access to pipelines, which inhibits lower-cost competitors from supplying Western Refining's key markets.

The company reported strong fourth-quarter results last month courtesy of significant improvement in refining margins. The company's earnings per share (excluding special items) came in at $1.19, which surpassed the Zacks Consensus Estimate of $1.04 and were also substantially higher than the year-ago adjusted figure of 60 cents. (Read our blog: Western Refining Tops Q4 Earnings on Improved Margins )

Western Refining also carries a Zacks Rank #2.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

VALERO ENERGY (VLO): Free Stock Analysis Report

WESTERN REFING (WNR): Free Stock Analysis Report

MARATHON PETROL (MPC): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

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


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

In This Story

VLO WTI MPC

Other Topics

Stocks