It was a rough April for the refiners. At the beginning of the month, the EPA outlined a proposal to reduce sulfur in gasoline starting in 2017. That news knocked prices down 10% to 15% across the entire sector. As the month progressed, the Brent/WTI spread has narrowed as WTI prices gained compared to Brent prices. According to Platts:
Refiners, on the other hand, have been enjoying better refining margins because the domestic crudes they bought, Bakken and other US domestic crudes, have been trading at huge discounts to Brent but since mid-February, the differentials for US domestic crudes have improved, tracking the changes in the Brent-WTI spread.
As the discounts to U.S. domestic crude evaporate, industry players wonder how long before it starts to affect refining margins because any benefit arising from cheaper U.S. domestic crude is being eroded by transport cost, as rail accounts for more than 60% of Bakken crude moving out of North Dakota.
Concerning these two issues, my take is that any new EPA regulations are years away and the markets overreacted. The regulations are just a proposal and not necessarily going to go into effect. Second, even though the Brent/WTI spread has narrowed, the refiners are still making plenty of money. Here, I’ve identified four refiners that have a PEG ratio below 1, a forward P/E of less than ten, and a market cap greater than $5 billion. Even though there are other refiners, these are the 4 that best meet that criteria.
Phillips 66 (NYSE:PSX)
Dividend Yield: 2.00%
PEG Ratio: 0.70
Forward P/E: 8.88
Phillips 66 (NYSE:PSX) represents the downstream assets that ConocoPhillips (NYSE:COP) spun off last year. The company owns and operates 15 refineries with a net crude oil capacity of 2.2 million barrels per day, 10,000 retail stations, and 15,000 miles of pipe lines. Phillips 66 (NYSE:PSX) also has a 50% interest in a natural gas gatherer and processor and a 50% interest in Chevron Phillips Chemical Company.
Phillips 66 (NYSE:PSX) has been buying lower cost shale and oil sands crude. The refinery has been using its rail cars to transport Bakken crude to its refineries. Phillips 66 (NYSE:PSX) reported refinery margins of $13.94 a barrel in the first quarter, which was the best in the company’s history. In the second half of this year, Phillips 66 is spinning off its midstream assets into an MLP called Phillips 66 (NYSE:PSX) Partners. This spin-off will create further value for shareholders.
Marathon Petroleum Corp (NYSE:MPC)
Dividend Yield: 1.80%
PEG Ratio: 0.53
Forward P/E: 7.98
Marathon Petroleum Corp (NYSE:MPC) is the largest refiner in the Midwest and the fourth largest in the United States. Its 7 refineries have a daily capacity of 1.69 million barrels. The company operates 6,100 Marathon Petroleum Corp (NYSE:MPC) retail stations and 1,460 Speedway retail stations. Marathon also has interests in 8,300 miles of pipelines.
Marathon Petroleum Corp (NYSE:MPC) is also able to transport cheaper Canadian and Bakken shale oil to its refineries. In the past year, Marathon Petroleum Corp (NYSE:MPC) has spent $2.2 billion to expand its Detroit refinery and also bought BP plc (ADR) (NYSE:BP)‘s Texas City refinery for $2.4 billion. By making these investments, it’s obvious Marathon Petroleum Corp (NYSE:MPC) sees further profits ahead in the refining business.
Dividend Yield: 2.00%
PEG Ratio: 0.72
Forward P/E: 7.04
Valero Energy Corporation (NYSE:VLO)
operates 16 refineries and 10 ethanol plants in the United States, Canada, United Kingdom, and the Caribbean. Total refinery capacity is 3 million barrels per day.
Valero Energy Corporation (NYSE:VLO) continues to unlock value for shareholders by spinning off its retail gas stations into CST Brands Inc (NYSE:CST). The company also plans to spin-off its logistics and transportation business into an MLP. This spin-off will further boost shareholder value. Three of Valero Energy Corporation (NYSE:VLO)‘s refineries on the Gulf Coast are able to refine the light crude oil produced by the various shale formations. The ability to refine this cheaper oil will keep Valero Energy Corporation (NYSE:VLO)‘s margins running steady.
Dividend Yield: 1.40%
PEG Ratio: 0.78
Forward P/E: 9.11
Tesoro Corporation (NYSE:TSO) owns and operates 7 refineries in western United States with a combined capacity of 675,000 barrels per day.
The company also operates approximately 1,400 branded retail stations.
Tesoro Corporation (NYSE:TSO) is making key moves for shareholders with its planned $2.5 billion purchase of BP’s Carson City, California, refinery. This acquisition would make Tesoro Corporation (NYSE:TSO) the largest refiner in the Pacific Basin and operate about a quarter of California’s refining capacity. This will allow Tesoro Corporation (NYSE:TSO) to combine operations with its Wilmington, California, refinery. This acquisition is currently undergoing regulatory approval and the company expects the transaction to close in the second half of the year.
Foolish assessment
In looking at the financials and prospects of all four companies, they still look cheap. Even though all four have had a good run over the past year, I view the recent weakness as a buying opportunity with all of them having more upside potential.
The article These 4 Refiners Are Still Cheap originally appeared on Fool.com is written by Mark Yagalla.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
