We recently published a list of 8 Best Oil Refinery Stocks To Invest In. In this article, we are going to take a look at where Phillips 66 (NYSE:PSX) stands against other best oil refinery stocks to invest in.
The global oil refining industry has undergone significant shifts over the past few years, driven by geopolitical tensions, changes in consumption patterns, and emerging market demands. As of 2023, the world’s refining capacity was estimated at 103.5 million barrels per day (b/d), according to the U.S. Energy Information Administration (EIA). With the recent disruptions in petroleum markets, such as Russia’s invasion of Ukraine and supply chain challenges due to COVID-19, there is heightened interest in how much refinery capacity will come online in the coming years to meet the rising demand for petroleum products. This interest is primarily centered on new projects expected to be operational by 2028, most of which are in high-demand regions like Asia-Pacific and the Middle East. The EIA’s analysis suggests that between 2.6 million b/d and 4.9 million b/d of additional refining capacity will be added globally over the next four years.
The focus on expanding refining capacity in countries such as China, India, and those in the Middle East stems from their rapid economic and population growth, which translates into a rising need for refined petroleum products. While countries in the Atlantic Basin, including the United States and Europe, have seen stagnating demand, the Asia-Pacific and Middle Eastern markets continue to grow robustly. These regions have also experienced increased investments in refining projects. For instance, Saudi Aramco has consistently been the largest investor in refinery capital expenditures, allocating over $9 billion annually since 2017, while China and India collectively contributed between $15 billion to $28 billion each year.
In contrast, refiners in the Atlantic Basin are expected to face slower demand growth and fierce competition. Refineries in these regions may encounter additional headwinds due to planned closures and the transition to renewable energy sources, which is further complicated by supply chain disruptions and geopolitical conflicts. Refinery expansions in countries like Nigeria and Mexico will also contend with distinct market conditions compared to the surging demand in Asia and the Middle East. Recent geopolitical tensions, such as Houthi attacks in the Red Sea, have increased shipping costs and further isolated the Atlantic and Pacific markets, reinforcing these divergent trends.
Global consumption of liquid fuels is projected to increase steadily through 2028, with the EIA estimating a rise to 105 million b/d by 2028. This demand is being fueled by a burgeoning middle class and higher incomes in developing nations, leading to increased consumption of consumer goods and transportation fuels. In response, refiners are ramping up capacity to meet this demand growth, with most of the projects concentrated in Asia and the Middle East. However, the Atlantic Basin market will see much slower demand growth, which could hinder investment in new refining projects. Consequently, the refinery expansions in the Atlantic Basin will likely lag behind those in the Pacific Basin.
The dynamics of the refining sector are further complicated by shifts in global crude oil production and trade. The EIA’s International Energy Outlook 2023 indicates that OPEC+ will continue its production restraint through 2028, potentially limiting crude oil exports from Middle Eastern producers. This could have profound implications for refiners in countries outside of OPEC+, such as the United States, Canada, and Brazil, who will need to supply crude oil to these new refining capacities in Asia and the Middle East.
Despite the challenges, the global refining landscape is witnessing a surge in capital expenditures from major players. The EIA’s report shows that 39 global refiners invested a total of $71 billion in 2023, marking a slight decline from 2022 levels after adjusting for inflation. The investment landscape is shaped by factors like growing crack spreads—the difference between petroleum product prices and crude oil prices—which have driven much of the capacity expansions over the past two decades. Although crack spreads remained strong in mid-2024, they have narrowed since the record levels of 2022. Nevertheless, several projects announced before the recent decline in crack spreads are expected to come online by 2028.
In summary, the outlook for the oil refining industry is marked by growth in capacity centered in the Asia-Pacific and Middle East regions, where demand is projected to rise sharply. While the Atlantic Basin market faces a more challenging environment, investments in refining projects remain significant. As geopolitical tensions and market dynamics continue to evolve, the industry must navigate a complex landscape to capitalize on emerging opportunities and address potential risks. Keeping this context in view, let’s take a look now at eight best oil refinery stocks to invest in.
Our Methodology
For this article, to compile our list of the best oil refinery stocks, we used Finviz stock screener and narrowed our focus from the broader oil industry to firms that limit themselves to oil refineries. A list of the 21 largest oil refining firms was initially compiled. From this dataset, we selected the top ten stocks most favored by institutional investors and ranked them in ascending order based on the number of hedge funds holding stakes in these firms as of Q2 2024.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A refinery manager walking through an array of pipes and pumping systems, recognizing the company’s vast refining power.
Phillips 66 (NYSE:PSX)
Number of Hedge Fund Holders: 33
Phillips 66 (NYSE:PSX) is a major player in the oil refining industry, operating as an energy manufacturing and logistics company. Its refining segment converts crude oil and other feedstocks into a variety of petroleum products such as gasoline, diesel, and aviation fuels. With refining being one of its primary operations, Phillips 66 (NYSE:PSX) has established itself as a leading company in the sector. The stock’s robust financial performance, strategic investments, and commitment to operational excellence make it a compelling addition to the list of the best oil refinery stocks to invest in.
In its Q2 2024 earnings report, Phillips 66 (NYSE:PSX) exceeded market expectations, reporting earnings per share (EPS) of $2.31 against an expected $1.98. This solid performance was primarily driven by high crude utilization rates and an improved cost structure. The company’s refining operations achieved a utilization rate of 98%, the highest in over five years. Moreover, Phillips 66 (NYSE:PSX) demonstrated efficiency by reducing its refining costs by nearly $1 per barrel, achieving adjusted controllable costs of $5.93 per barrel.
One of the key highlights of the quarter was Phillips 66 (NYSE:PSX) strategic acquisition of Pinnacle Midstream, enhancing its midstream capabilities and bolstering its presence in the Permian Basin. The move is expected to contribute to stable earnings through high-quality, fee-based contracts. Additionally, the company successfully executed the sale of its 25% non-operated interest in the Rockies Express Pipeline, generating $685 million in proceeds, which helped Phillips 66 (NYSE:PSX) surpass its target of $3 billion from asset dispositions.
The company’s disciplined approach to capital allocation is reflected in its commitment to returning more than 50% of operating cash flows to shareholders through dividends and share repurchases. Since July 2022, Phillips 66 (NYSE:PSX) has returned over $11 billion to shareholders, with plans to reach $13 billion to $15 billion by the end of the year. This strong cash flow generation, coupled with prudent cost management and strategic investments, underscores the company’s financial strength and long-term growth prospects. Overall, Phillips 66 (NYSE:PSX) focus on maximizing shareholder value, expanding its asset base, and achieving operational excellence positions it well among the top oil refinery stocks to invest in.
Overall, PSX ranks 3rd on our list of Best Oil Refinery Stocks To Invest In. While we acknowledge the potential of PSX to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PSX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.