Why independent refiners did better during the energy decline
Must-know: Top energy stocks after the recent energy decline (Part 8 of 9)
Independent refiners
In this part of the series, we’ll discuss how independent refiners performed when the energy prices declined.
The group only has a handful of companies. As a result, we kept the market cap threshold at the $5 billion mark.
Different business model
Refiners’ profits are driven by the difference in the prices of refined products—like gasoline and diesel—and the cost of crude oil. So, when energy prices dell sharply over the last four months, refining companies didn’t lose as much as their upstream peers.
Also, low natural gas prices reduce refiners’ operating costs.
Refiners need to hold large crude oil inventories. They also need refined products in their inventories. The inventories’ value will decrease as energy prices drop.
Analysis
Tesoro Corp. (TSO) was the outlier. It had a positive showing. This was probably because of its strong refining margins. It has some of the strongest refining margins in the industry. It has an excellent free cash flow yield. Strong growth is expected in the next year.
Its MLP subsidiary—Tesoro Logistics (or TLLP)—performed well during the period. This helped the company stay strong during the challenging period. Recently, TSO scaled a new 52-week high in the days after TLLP’s announcement of a $2.5 billion acquisition of QEP Field Services.
Claim to fame
Among the remaining companies, Valero Energy (or VLO) should stand out for the value investor. It has low valuation multiples, even though it has some of the best return metrics.
Phillips 66 (PSX) stands out because of its decrease. PSX is large with an ~$42 billion market cap. It has diversified operations that span logistics to chemicals. This means PSX’s profits shouldn’t be affected as badly by the drop in crude prices—compared to its pure refining peers.
HollyFrontier (HFC) has strong growth prospects, considering its outstanding margins—gross refining and operating. It has a strong dividend yield of ~7.5%.
Marathon Petroleum (MPC) is a strong market performer. It has great return and operating metrics. It also has low valuation multiples.
Key exchange-traded funds (or ETFs)
The iShares U.S. Energy ETF (IYE) provides investors with low-cost, diversified exposure to battered U.S. energy companies.
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