Valero Energy Corporation (VLO), Phillips 66 (PSX): The Brent-WTI Spread Is Falling; Are Refineries Overvalued?

With a total debt to equity ratio of 0.78, Western Refining, Inc. (NYSE:WNR) carries more debt than its larger cousins. Thankfully, its ROI of 36.6% and profit margin of 5.7% are healthy enough for it to easily make its debt payments. It trades at 2013 forward P/E around 7.2 and is one of the better deals among small refineries.

Alon USA Energy, Inc. (NYSE:ALJ) has interests in a number of refineries in Texas and California. Like Western Refining, its Texan refineries are in a great position to take advantage of cheap Texan oil. The downside is that Alon’s Californian refineries decrease its Texan advantage. Alon is the largest 7-Eleven licensee in the U.S. with almost 300 retail stores. It has been aggressively paying down debt but it still has a total debt to equity ratio of 0.96.

Alon USA Energy, Inc. (NYSE:ALJ) is best left for another day. Its California refineries expose the company to some of the most stringent regulations within the nation. Its profit margin of 2.1% is not spectacular. Also, the company trades at a 2014 P/E ratio of 11.3 that is above many of its competitors.

Conclusion

The North American energy market is working through its midstream transportation constraints and the shrinking WTI-Brent spread is impacting refineries. Phillips 66 (NYSE:PSX) will get stuck with the short end of the stick as its earnings are expected to fall from 2013 to 2014. Alon is best left for another day as it has a high debt load and trades at a relatively high valuation.

Western Refining is a convincing investment, but Valero Energy Corporation (NYSE:VLO) looks like a better deal. Western Refining is close to cheap Texan oil, but it is also constrained by its small size. Valero has a number of new hydrocracking projects that are coming online that will give the firm a strong boost.

Joshua Bondy has no position in any stocks mentioned. The Motley Fool owns shares of Western Refining. Joshua is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article The Brent-WTI Spread Is Falling; Are Refineries Overvalued? originally appeared on Fool.com and is written by Joshua Bondy.

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