When it comes to investing in the energy sector, you probably know the usual suspects. Companies like Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) dominate the space and carry huge market capitalizations in the hundreds of billions of dollars. Stocks such as these are Dow Jones 30 components, and some of America’s best known and most closely followed companies. They pump out big profits and are known for rock-solid balance sheets and reliable dividend increases. However, you may not be as familiar with oil refinery stocks, which carry many of the same qualities as the big boys of the energy sector. Stocks in the refinery industry have strong operations with solid dividends, along with more room for their stocks to run due to smaller market values than their mega-cap brethren.
Phillips 66 (NYSE:PSX) is an interesting name both because it carries the largest market capitalization of the refiners and only recently began trading as an independent entity. Formerly owned by ConocoPhillips, Phillips 66 (NYSE:PSX) was spun off last year. At the time, management felt that each part of the company would be worth more than the sum of the parts, and they’ve been proven right. Phillips 66 (NYSE:PSX) stock has soared since the spin-off, advancing more than 80% since the split.
Phillips 66 (NYSE:PSX) reported full-year 2012 adjusted earnings of $8.46 per share, compared with adjusted earnings per share of $5.66 a year ago. Its impressive operating performance means that despite its huge share price acceleration, the stock still isn’t expensive on a trailing earnings basis. The stock currently trades for less than 8 times its 2012 adjusted earnings per share. In addition, the company has raised its dividend twice already, and yields 2% at recent prices.
Valero Energy (NYSE:VLO) is a close competitor of Phillips 66 (NYSE:PSX), with a slightly smaller market value of approximately $25 billion. Like Phillips 66, Valero Energy Corporation (NYSE:VLO) also reported spectacular fiscal 2012 fourth-quarter and annual results. Full-year 2012 net income attributable to Valero Energy Corporation (NYSE:VLO) Energy Corporation (NYSE:VLO) stockholders was $2.1 billion, or $3.75 per share. Included in the results were non-cash asset impairment losses of $983 million after taxes, or $1.77 per share. Stripping away all one-time events, adjusted earnings per share came in at $5.59 for the full-year.
Valero Energy Corporation (NYSE:VLO) attributed its success to higher refining margins as well as lower refining expenses. This combination led to the spike in Valero’s profitability. Going forward, the company intends to utilize cash from operations effectively for shareholders through a number of initiatives. First, management intends to keep buying back stock to increase earnings per share. For the full-year 2012, Valero used $281 million to purchase 10.6 million shares of the company’s stock.
In addition, Valero is committed to strengthening its capital structure by paying down debt. To this end, Valero retired $180 million of 6.7% senior notes that matured in mid-January of this year and expects to retire $300 million of maturing notes in the second quarter of 2013.
Finally, management is committed to providing shareholders with a competitive dividend. The company’s board of directors approved an increase in the company’s regular quarterly cash dividend on common stock from $0.175 per share to $0.20 per share going forward, representing an increase of more than 14%. At current prices, the stock yields roughly 1.75%.
Last but not least, Devon Energy (NYSE:DVN) is a competitor in the oil refinery space that is in the midst of a turnaround. Shares of Devon Energy Corp (NYSE:DVN) have not enjoyed the same rallies as its refining peers. The stock is trading near multi-year lows and more than 40% below its recent highs from April 2011.
On the surface, Devon Energy Corp (NYSE:DVN)’s most recently reported results were discouraging. The company reported a net loss of $357 million for the fiscal fourth quarter, or $0.89 per diluted share. However, the true operating performance of the company was not as dire. Excluding an asset impairment charge and other items securities analysts typically exclude from estimates, Devon Energy Corp (NYSE:DVN) actually earned $0.78 per diluted share in the fourth quarter of 2012.
Asset impairments also led to a loss of $206 million for the full year, representing a loss of $0.52 per diluted share. Excluding adjusting items, the company turned a profit of $1.3 billion or $3.26 per diluted share in 2012. The company believes its strong production numbers are a reason for optimism going forward. Devon Energy Corp (NYSE:DVN) recorded the highest production total in the company’s history from its North American property base. Devon also pays a dividend to shareholders of 1.5% annualized.
The Foolish bottom line
These stocks have strong records of profitability and management teams that understand how to reward shareholders. Each of them is trading for modest valuations. The challenge going forward for each of these stocks will be to continue to execute. These companies have performed extremely well as their margins increase along with decreasing expenses. However, the energy market can be cyclical, and it remains to be seen if this momentum can continue. For now, investors certainly can’t complain with the profit numbers, share buybacks, and dividend increases these companies provide.
The article Look for Gains With These Oil Refiners originally appeared on Fool.com and is written by Robert Ciura.
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