Valero Energy Corporation (VLO), HollyFrontier Corp (HFC), Western Refining, Inc. (WNR): 3 Refiners With Potential Upside

Valero Energy Corporation (NYSE:VLO) has dropped significantly since the beginning of February, from more than $46 per share to only $36 per share. Scott Black, the Chairman and CIO of Delphi Management, has taken advantage of the low stock price to add more Valero’s shares to his portfolio. Andreas Halvorsen of Viking Global is also bullish about the firm, owning more than 6.7 million shares in the company. Let’s take a look to determine Valero’s level of attractiveness at its current price.

Valero could have cheaper inputs with the new pipeline

Valero Energy Corporation (NYSE:VLO) is operating 16 petroleum refineries in the U.S., Canada, the U.K., and Aruba, with the throughput capacity of around 2.8 million barrels per day. The company is also considered one of the biggest renewable fuel companies, operating 10 efficient corn ethanol plants with the nameplate production capacity of around 1.1 billion gallons/year. In the refining segment, gasoline and blendstocks and distillates are the two major revenue contributors, generating $55.65 billion and $51.5 billion, respectively, in 2012 revenue.

Valero Energy Corporation (NYSE:VLO) has been focusing on delivering long-term shareholder value through three main actions. First is exploiting the resource advantages of the North American region, including domestic light crude oil processing, expanding distillates hydrocracking capacity, and increasing products export capability. Second, Valero has been restructuring its business to unlock hidden value, by spinning off its retail business into CST Brands. Moreover, the company is thinking about converting its midstream assets into a master limited partnership structure. Last but not least, Valero reported that it would increase its cash return to shareholders via dividends and share buybacks.

Andreas Halvorsen, in his second-quarter shareholder letter, expressed his bullish attitude towards Valero Energy Corporation (NYSE:VLO). He mentioned that refiners around the Gulf of Mexico have enjoyed cost disadvantage because they had to source expensive crude imports, while other refiners in the mid-continent area could buy cheaper inputs from shale oil developments. However, Valero, with more than 50% of its capacity around the Gulf, will benefit from the newly built pipeline to transfer the cheap domestic crude. The market values Valero at only 3.85 times its trailing EBITDA (earnings before interest, taxes, depreciation, and amortization).

Cheap valuation but higher than its peers

Compared to its peers HollyFrontier Corp (NYSE:HFC) and Western Refining, Inc. (NYSE:WNR), Valero Energy Corporation (NYSE:VLO) has the highest valuation among the three. HollyFrontier has a cheaper valuation. The market values HollyFrontier at only 2.36 times its trailing EBITDA. HollyFrontier is operating around five refineries with the refining capacity of around 443,000 barrels per day, mainly in the areas of Rocky Mountains, Southwest, and Mid-Continent.

HollyFrontier Corp (NYSE:HFC) has a good history of returning cash to shareholders, including dividends and share buybacks. Since the merger, the company reported that it had raised its dividends by 300%, with eight special dividend payments. Moreover, it also authorized two share repurchase programs, each worth around $350 million. In the past twelve months, HollyFrontier’s cash yield to shareholders was around 7%, the second-highest among peers. Valero Energy Corporation (NYSE:VLO)’s last-twelve-month cash yield is only 2%. Western Refining, Inc. (NYSE:WNR) offers investors the highest cash yield at 9%. At the current trading price, HollyFrontier’s dividend yields 2.70%.

Western Refining, Inc. (NYSE:WNR) also has a lower valuation than Valero Energy Corporation (NYSE:VLO). The market values Western Refining at 2.87 times trailing EBITDA. Western Refining operates in several regions, including El Paso and Gallup, New Mexico. Investors might like Western Refining due to its recent significant increase in dividend. Recently, the company’s board announced a 50% hike in its dividend, from $0.12 per share in the second quarter to $0.18 per share in the third quarter of 2013. At the current trading price, its dividend yield is around 2.40%.

In the first quarter, it also issued lower cost debt, at around 6.25%, to pay off older 11.25% senior secure notes. This move has effectively reduced its interest expense by $15 million. Looking forward, the company should take advantage of the crude oil cost by capitalizing on Delaware and San Juan Basin logistics opportunities. It also thinks of developing El Paso expansion project and the traditional MLP formation for its logistics assets. Simultaneously, Western Refining, Inc. (NYSE:WNR) will focuses on cost savings with SG&A initiatives and working capital reduction.

My Foolish take

Valero Energy Corporation (NYSE:VLO), with the upcoming pipeline to transfer cheap domestic inputs, could improve its profitability in the near future. Interestingly, HollyFrontier Corp (NYSE:HFC) and Western Refining, Inc. (NYSE:WNR) have lower EBITDA multiples than Valero, with higher total yields and dividend yields. With low valuations, decent cash return to shareholders, all three refiners might experience a good run-up in the near future.

Anh HOANG has no position in any stocks mentioned. The Motley Fool owns shares of Western Refining.

The article 3 Refiners With Potential Upside originally appeared on Fool.com.

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