Like the United Sates, both of our neighbors are awash in an abundance of energy. And both are catching the export bug in a big way.
Despite the Keystone XL fiasco, Canada’s vast oil sands and heavy oil abundance continues to flow down into the U.S. New south-directed pipelines and rail terminals have enabled Canada to ship expand its exports into the U.S. by 63% during the last five years — reaching a record 3.1 million barrels a day this past summer. That amount is steadily increasing as more these pipelines — like the Seaway Twin — have come online.
Meanwhile, Mexico is slowly ramping up its own production as new rules have allowed foreign firms to come frack and drill on its lands. Already, the nation sent a whopping 675,000 barrels of heavy crude a day into the U.S. However, like Canada, that number is set to grow as new energy logistics systems are built.
And you know who the real winners are in all of this? Not the energy stocks who produce the crude, but the refiners on the Gulf Coast.
Western Canadian Select is already averaging a $18 to $25 per barrel discount to U.S.-produced West Texas Intermediate (WTI) benchmark crude, while Mexican Maya is around $7 to $14 per barrel. That means refiners in the Gulf — who are able to process the heavy oil — will be able to feast on insane margins per barrel.
All in all, there’s still plenty of gas left in refiners. Here are three energy stocks that will benefit the most.
Refining Energy Stocks to Buy: Valero Energy Corporation (VLO)
With seven refineries along the Gulf Coast, Valero Energy Corporation (VLO) could be among one of the best energy stocks to buy if you want to harness Canada and Mexico’s race to import.
The key is that VLO has spent a pretty penny upgrading many of these facilities to handle the heavier crude oils produced around the world. Sour crude is a tougher nut to crack and Valero’s facilities are some of the biggest in the U.S. designed to handle this. And with Valero’s refineries located near inbound pipelines and tanker terminals, the company can pick and choose which crude to use at different times based on price advantage, and that’s a huge help to profits.
VLO already has realized stellar crack spreads and margins for the past few years. For its latest reported quarterly earnings, VLO made $2 per share in profits, crushing analyst estimates of $1.57, as well as the 57 cents per share it made in the year-ago quarter. Any additional boost from the import war will only strengthen those earnings further.
Add in the continued gains from its MLP spinoff Valero Energy Partners LP (VLP), and you have a recipe for success in VLO stock.
Refining Energy Stocks to Buy: Marathon Petroleum Corp (MPC)
If VLO is a screaming buy, Marathon Petroleum Corp (MPC) isn’t far behind.
Like Valero, MPC has a host of assets across the United States, but it has the second-most facilities along the Gulf Coast. And those facilities are specifically designed to process heavier sour crude oils. In fact, MPC already generates the majority of its output from heavy crude oil.
Additionally, Marathon already receives about 40% of its feedstock needs from foreign sources, with Canada and Mexico being the chief suppliers.
That puts MPC in the driving seat as the two nations compete to get their crude oil into the U.S. Mexican state-owned oil company Pemex has already pledged to give U.S. refiners a $3.78 per barrel discount. That kind of hefty discount is exactly what MPC needs to boost its fat margins even fatter. During the last quarter, MPC saw a monster 75% increase in profits as oil prices fell. But even better numbers could be in store as more Canadian and Mexican crude hit our shores.
Meanwhile, MPC shares trade for just 11 times earnings (comparable industry companies trade for roughly 14x), and offer a 2.4% dividend yield to boot.
Refining Energy Stocks to Buy: Phillips 66 (PSX)
While Phillips 66 (PSX) isn’t necessarily as good of a play on the Canada/Mexico Import war as VLO and MPC, it’ll still be a clear winner and among the better energy stocks to buy.
Two of PSX’s three refineries in the Gulf — its Lake Charles & Sweeny facilities — are designed to handle heavy sour crude. Both refineries are set up to receive feedstocks from both tanker ships as well as domestic pipeline/crude-by-rail sources. Like MPC/VLO, that gives it pricing flexibility to choose the best priced crude for its operations. Additionally, the fact these facilities sit on the water allow Phillips to export finished products — like gasoline — back out into the intentional markets.
Why the effect of a price war won’t be felt as strongly as the other energy stocks on this list is just because of the huge size of Phillips’ operations. The firm includes refining assets on the Atlantic Coast and in Europe. These facilities still are tied to higher-priced Brent crude, and even considering the recent declines in Brent, those ties will clip some of the margin effect from Canada/Mexico. (It’ll be there, just not as pronounced as with Marathon and Valero).
Nevertheless, PSX continues to be a profit-making machine. And with a P/E under 9 and 3% dividend yield, Phillips 66 should be a lock on your list of energy stocks to buy now.
As of this writing, Aaron Levitt was long MPC and the Vanguard Energy ETF (VDE), which holds all three picks in this article.