Refinery inputs are rising
According the U.S Energy Information Administration, in the past several months refinery inputs have been picking up. As of last week, refinery inputs reached approximately 16.1 million barrels per day, which is nearly 2.7% above last year’s levels. The rise in the refinery inputs are likely to boost the revenue of leading oil refinery companies such as Valero Energy Corporation (NYSE:VLO) and Western Refining, Inc. (NYSE:WNR).
In previous months, the refinery outages may have adversely affected the revenue of major refineries, but the current expectations are that refinery inputs will keep increasing.
The chart below presents the developments in U.S refinery inputs and the price for oil during 2012 and 2013.
The rise in refinery inputs also coincided with the increase in the price for oil, which is currently well above $100 per barrel. These two developments are likely to positively affect the revenue of major refineries.
Revenue and profit margins
Some leading refineries in the U.S haven’t done well in the past quarter: In the second quarter, Valero Energy Corporation (NYSE:VLO)’s revenue slid by 1.8%. One of the reasons for the decline in revenue was the drop in volume of throughput: The total volume of throughput fell by nearly 2%, which accounts for part of the drop in refinery revenue.
Valero Energy Corporation (NYSE:VLO)’s operating profitability shrank in the second quarter from 4% in 2012 to 2% in 2013. According to the company, the decline in profitability was partly due to a drop in throughput margin that reached $9.36 per barrel in the second quarter compared to $10.63 – a 12.9% decline (year-over-year).
Valero Energy Corporation (NYSE:VLO) is still seeking growth and projects its capital expenditure in 2013 will reach $2.8 billion – so far the company’s capital expenditure was nearly $1.4 billion in the first half of the year. In 2014, this provision is expected to reach between $2.5 billion and $3 billion. These steps are likely to enable the company to reach growth in revenue in the coming years.
Moreover, the drop in profit margins was also partly due to the contraction in the price difference between Brent and West Texas Intermediate (WTI). The current price difference is around $2, which is likely to continue adversely affecting these companies’ profit margins in the coming quarters. (Here is an article that explains the potential adverse effect of narrower differentials on refining companies.)
Western Refining, Inc. (NYSE:WNR)’s revenue also declined by 1.6%. Moreover, the company’s operating profit also fell by more than 32% (year-over-year). The drop in operating profit was stemmed by the 3.9% decrease in total volume sold and the 25.7% tumble in the refinery’s gross margin.
In terms of investment, the company’s capital expenditures were $101.8 million in the first half of 2013 compared to only $59 million in the first half of 2012. The sharp rise in capital expenditures is a positive sign for potential growth in operations in the future.
Marathon Petroleum Corp (NYSE:MPC), unlike Valero Energy Corporation (NYSE:VLO) or Western Refining, Inc. (NYSE:WNR), augmented its revenue in the second quarter of 2013: Its net sales rose by nearly 27%. Despite the rise in revenue, its profit margins shrank from 6% to 4% in the second quarter. The spike in revenue was due to a spike in total refinery throughputs of approximately 39%. The sharp rise in throughputs was mostly attributed to the Galveston Bay refinery, which was acquired on Feb. 1. If the company continues to increase its operations by purchasing more refineries, this is likely to keep its revenue growing.
The company’s drop in profitability was due to the decrease in refining and marketing gross margins, which plummeted by 44.5% (year-over-year).
But the ongoing rise in U.S refinery input and the recent increase in the price for oil are likely to pull up the revenue of leading refining companies and may also improve their refining margins.
Dividend
These refineries have recently increased their dividend payments and they offer reasonable dividend yields: Valero Energy Corporation (NYSE:VLO)’s annual dividend yield is around 2.6%. Further, Marathon Petroleum Corp (NYSE:MPC)’s dividend was recently raised and currently pays an annual yield of 2.3%. Western Refining, Inc. (NYSE:WNR)’s yearly dividend yield is around 2.3%.
These companies continue to increase their dividend payments despite the drop in their profit margins. If they keep going in this direction, they are likely to make more attractive investments.
Is the price right?
Despite the rally in some of these oil-refining companies, their current valuations are still low for the industry. In the table below are these companies’ enterprise value and their EV-to-EBITDA ratios.
This calculation accounts for these companies’ financial structure and not just their earnings and market cap. The yearly EBITDA is based on the last four quarterly earnings reports. Based on the above, all three companies have a low EV-to-EBITDA ratio compared to the industry average. Their ratios are very close to one another so they suggest, at face value, these companies’ valuations aren’t high.
Takeaway
The contraction in the Brent-WTI spread might adversely affect the profitability of some refining companies. But the following factors suggest these refining companies will augment their revenue and profit margins: the current high price for oil, recovery in refinery inputs, and ongoing increases in capital expenditures. Finally, refineries’ reasonable dividends and reasonable stock prices make these companies worth considering for your portfolio.
The article Are Refiners Making a Comeback? originally appeared on Fool.com and is written by Lior Cohen.
Lior Cohen has no position in any stocks mentioned. The Motley Fool owns shares of Western Refining. Lior 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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