As crude oil prices continue to live a range-bound existence between $40 to $60, albeit at the lower end of the range these days, pressure exists across the oil and gas industry. Refiners though, have fared better than other companies further up the value chain.
The Oil & Gas Refining and Marketing group as classified by Google Finance is down just 3% year-to-date vs. Oil Related Services and Equipment, down 27%. Oil & Gas Transportation Services is now up 5% after recovering from an over 15% drop in early June.
Refiners offer attractive yields without the volatility of transportation services where much sentiment is intertwined with political processes. Here are three well-run companies that pay you well to wait for a rebound in crude prices, but won’t go into the red too much if crude prices continue to slide.
High-Yielding Refiners to Buy: Valero Energy Corporation (VLO)
Dividend Yield: 4.1%
Valero Energy Corporation (NYSE:VLO) is the second-largest domestic refiner by market cap, second only to Phillips 66 (NYSE:PSX). VLO produces a higher dividend yield at a more favorable price-to-earnings multiple and price-to-book.
Valero has also outperformed PSX significantly over the challenging past year: VLO stock is up 32% vs. 11% for PSX stock. However, during a five-year period of lower than average crude oil prices, both have done reasonably well. Still, VLO outperformed the larger refiner: capital gains of 165% vs. 140%.
A 4.1% dividend for a consistent producer during a time where gasoline margins should be improving due to seasonal patterns and export demand isn’t a bad deal at all. Management does expect “medium and heavy sour crude oil discounts are expected to remain weaker than their five-year averages as supplies of sour crude oils available in the market continue to decline,” but against this backdrop ethanol margins should improve.
Importantly, VLO’s average refining EBITDA per barrel throughout is top notch, ahead of its peers. For the last full fiscal period, Valero did $7.09 per barrel compared to $6.23 per barrel for its peers.
High-Yielding Refiners to Buy: HollyFrontier Corp (HFC)
Dividend Yield: 4.6%
HollyFrontier Corp (NYSE:HFC) is interesting because of its exposure specialty lubricants, so its more than just a refiner. On the refining side, it has five spread across the Mid-Continent, Southwest and Rockies with capacity of 457,000 barrels per day.
There are opportunities to reduce operating expenses that will squeeze some additional value from existing refineries.
Although it’s a smaller player in the refining business, HFC ranks as the fourth-largest North American Base Oil Producer with its lubricant production capacity of 28,000 BPD. This lubricants division helps diversify revenues given a challenging crude environment.
The acquisition of Petro Lubricants Canada will add 15,600 barrel per day in lubricants production capacity, which propelled HFC from the ninth spot by BPD to the fourth spot. The result is a force to be reckoned with that will become leaner and more efficient. It will also reap the benefits of revenue and cost synergies. Management is quick to note that Lubricant and Lubricant Additive companies trade at premium earnings and EBITDA multiples relative to Refiners.
High-Yielding Refiners to Buy: PBF Energy Inc (PBF)
Dividend Yield: 5.4%
PBF Energy Inc (NYSE:PBF) is smaller than the other picks at $2.5 billion market cap. It has five refineries with 884,000 barrels per day of processing capacity. Compare that to VLO’s 3.1 million barrel per day capacity.
But PBF makes up for this in diversification, with west coast exposure via its Torrance refinery.
Torrance is undergoing a bit of a turnaround. Currently, it has 155,000 barrel throughout capacity. PBF is targeting $50 million operating cost reductions over the next two years, which will enhance overall margins.
PBF also has a strategic relationship with PBF Logistics LP (NYSE:PBFX). PBF indirectly owns 100% of the general partner and ~44% of the limited partner interests of PBFX and from this arrangement, it receives all incentive distribution rights (IDRs). This provides PBF with a source of stable cash flows without any direct commodity exposure, and ultimately a different source of capital to grow its business.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
