The deal is closed
Tesoro Corporation (NYSE:TSO), the independent refiner of petroleum products, is going from good to great. The company recently announced that it has completed the acquisition of BP’s Carson refinery and all its related assets. The refinery is a 266 million barrels a day (mbd) complex located next to Tesoro’s 97 mbd Wilmington refinery, south of Los Angeles.
The transaction also includes related logistics assets, nearly 800 dealer-operated retail sites, as well as a 51% ownership in a 400 mega-watt gas fired generation plant. This generation plant sells about 25% of its power to the Carson refinery and the rest to the local utility grid. The grid will be extended to the Wilmington refinery for additional cost savings. Besides, the deal includes a 350,000-metric ton/year anode coke calcining operation.
The acquisition is expected to add up to $500 million to Tesoro Corporation (NYSE:TSO)’s annual EBITDA and up to $245 million to the company’s net income (before synergies). The purchase price is $1.08 billion, plus the market value of inventory, currently around $1.3 billion. This deal will expand its refining capacity by 50%, making Tesoro a great buy even at today’s valuation.
The company’s shares are trading at 10.1x P/E and 5.9x P/CF based on an after-deal 2014 consensus. This compares to its peers average of 8.9x and 6.3x, but Tesoro Corporation (NYSE:TSO)’s management and current market position justify the premium. Even if Tesoro’s dividend yield of 1.23% is the lowest among its peer group, the company is my favorite pick among this group of three.
Share buy-backs should boost this stock
Valero Energy Corporation (NYSE:VLO), with a market capitalization of $22.8 billion, is a much bigger and mature company than Tesoro Corporation (NYSE:TSO) (which has a market capitalization of $8.6 billion). Indeed, it is the largest refiner in North America. This means that the company is more focused on delivering cash to its shareholders than on growing its top line.
As a matter of fact, Valero Energy Corporation (NYSE:VLO) is expected to generate free cash flow, after CAPEX and dividends, of $1.6 billion this year and roughly $2 billion in 2014. The company’s management is committed to use this cash to retire debt at maturity, grow dividends, and (above all) buy back shares. The company is expected to generate an EBITDA of $6.46 billion in 2013 and $6.36 billion in 2014.
Trading at 2013 8.3x P/E, 4.8x P/CF, and paying a 2% dividend, Valero Energy Corporation (NYSE:VLO) is a great alternative within the space for those looking for a much more stable company. You will not get the kind of upside potential you may achieve through Tesoro, but you will also own a much more stable asset which will keep on increasing its cash dividend yield at a steady rate.
First-quarter earnings disappoint but still impressive
HollyFrontier Corp (NYSE:HFC), the independent petroleum refiner and wholesale marketer of refined petroleum products, which was formed by the merger of Holly Corp and Frontier Oil, disappointed some investors with its first-quarter results.
Adjusted first-quarter earnings came roughly 8% below consensus thanks to a lower than expected crude output due to a heavy turnaround schedule, which increased operating costs and reduced margin. That said, short-term results should be disregarded when analyzing HollyFrontier Corp (NYSE:HFC). After all, the company’s refineries are the most profitable in the U.S. and it has been increasing earnings by 41% Year over Year (YoY).
The market has been focusing on short-term results (that came below expectations) and has lost track of the long-term picture. This is the reason to explain its relative under-performance. Having trailed its peer group, HollyFrontier Corp (NYSE:HFC)’s stock is up by only 6.5% YTD.
Trading at 2013 7.7x P/E, 6.2x P/CF, and paying a 2.50% dividend, HollyFrontier Corp (NYSE:HFC) is a good option for those looking for upside potential and a relevant cash dividend within the refinery space. As a long-term investor, you should focus on the fact that the company has the most profitable refineries in the country and, as a result, it will always be an attractive M&A target for bigger corporations such as Valero.
Bottom line.
If I had to invest in the sector, I would go long Tesoro Corporation (NYSE:TSO). Valero Energy Corporation (NYSE:VLO) and HollyFrontier are also great alternatives, but I think Tesoro has the greater upside potential, even when it is relatively expensive. Considering Tesoro’s smaller market capitalization ($1 billion below HollyFrontier’s market capitalization) and its great management, I feel Tesoro might be a good M&A target for bigger companies. HollyFrontier Corp (NYSE:HFC) would be my second choice given its ultra-profitable refineries and its price. Valero Energy Corporation (NYSE:VLO) is a mature company which is the perfect alternative for those looking for much more stable cash flows.
The article Reviewing 3 Oil Refining & Marketing Companies originally appeared on Fool.com and is written by Federico Zaldua.
Federico Zaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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