Despite the big downturn within the vitality market over the previous yr or so, one segment of the oil and gas world has accomplished fairly well: refiners. Low cost crude has made for a pleasant feedstock for his or her amenities, which has allowed a few of the companies within the house to churn out some fairly impressive outcomes lately. For traders searching for steady, money-generating investments that can act as a pure hedge to extra conventional oil and gas investments, refining stocks are an excellent place to look. Then again, simply shopping for an organization because it’s labeled “refiner” is probably not the perfect technique, both.
So we asked three of our power contributors to select a superior refiner in its house. Here’s what they had to say:
Tyler Crowe: One firm that I have stored an eye on for some time is HollyFrontier (NYSE:HFC). It will not be certainly one of the biggest refiners within the space or one which has entry to export markets like Gulf Coast refiners, however one thing it has is a great management crew that’s excellent at allocating capital and returning money to shareholders.
All of HollyFrontier’s refiners are positioned in both the Midcontinent or Rocky Mountain area of the U.S., so it pretty much solely serves domestic markets. The rationale it may well compete so properly in this space, though, is that it has a sturdy infrastructure network it owns by Holly Power Partners (NYSE:HEP). This community enables the corporate to routinely supply crude oil sourced at prices decrease than the benchmark West Texas Intermediate. To date this 12 months, it has been able to secure oil for its refineries at a few 5% discount from spot costs.
On prime of this sourcing benefit, management has put an awesome onus on efficient operations and controlling prices. These efforts, mixed with well-positioned capital investments in its refineries and infrastructure, enable the company to generate lots of excess money, which it gives back to shareholders generously by means of dividends and share repurchases. In reality, this high degree of money era and prudent capital self-discipline have resulted in the company producing the highest average returns on capital employed within the refining house over the past 5 years.
Supply: HollyFrontier investor presentation.
With that sort of track record, HollyFrontier appears to be like like a really compelling funding.
Matt DiLallo: Valero Energy (NYSE:VLO) is absolutely, actually having fun with lower oil prices. Last quarter, the corporate’s refining phase produced $2.2 billion in operating earnings, which was greater than double what it delivered within the year-in the past period. Fueling that revenue is the company’s margins, which are robust due to decrease oil costs. Moreover, it’s having fun with wholesome demand as it’s pumping out as much gasoline and diesel as it might, with throughput volumes averaging 2.8 million barrels a day, which was 87,000 barrels a day larger than the prior interval.
These robust working circumstances are filling up Valero’s coffers with so much of money. Nonetheless, it doesn’t need an entire lot of cash to function its enterprise, so it is returning most of it again to traders. In reality, it has increased its shareholder distributions this 12 months so that it plans to return 75% of 2015 web revenue to traders. The majority of that cash will come from inventory buybacks — it not too long ago bolstered its buyback authorization by $2.5 billion. When combined with the $four hundred million it had left on its earlier authorization, Valero now has the capability to purchase back roughly 10% of its excellent inventory.
Even with all of the cash it is returning to shareholders, it’s nonetheless investing in development initiatives, with plans to spend $1.5 billion this 12 months. The majority of these projects are designed to extend its entry to low-cost North American crude oil, which should solely improve its refining Petroleum Refinery Supplier margins further. On high of that, it has a number of fascinating tasks beneath consideration that would allow it to reap the benefits of the abundance of cheap energy resources in North America.
Suffice it to say, if you’re in search of an important refining inventory, Valero Energy needs to be close to the highest of the record.
Jason Corridor: Refiners are way more greatly affected by volume and demand than they are by gasoline costs. The value of refined products like gasoline, diesel, and jet gasoline are closely connected to the value of oil, which is the main input cost for refiners, as compared to the fixed costs of working a refinery.
In different phrases, they’ll still make good cash even when oil costs fall, so long as demand stays relatively stable, and while demand development may be slowing, world demand for refined products stays very robust.
The thing is, my favorite refiner (and that i bet Tyler and Matt are sick of hearing me say so), Phillips sixty six (NYSE:PSX), isn’t my favorite because of its refining operations.
Do not get me wrong: Phillips 66’s refining business (and the marketing enterprise that sells the refined products) produces the lion’s share of the company’s cash flows and income, and is likely to keep doing so for years to come. However it is what it is doing with these money flows that has me most excited about the long-time period future of this firm: investing in midstream and petrochemicals growth.
Phillips sixty six could have doubled its petrochemicals enterprise when the present expansion merchandise are completed on the U.S. Gulf Coast, and its midstream enlargement will connect a number of main oil and gas plays to pipelines.