The Greatest Oil Refinery Shares Now

Up to date on July twenty sixth, 2023 by Bob Ciura

Oil refiners have loved a powerful rally because the of the pandemic, due to the restoration of world consumption of oil merchandise.

The rally has continued over the previous yr due to the sanctions of western international locations on Russia, in response to its invasion in Ukraine. These sanctions have tightened the worldwide provide of oil merchandise, which led to increasing refining margins.

Over the previous yr, all however one of many prime 4 oil refiners generated complete returns (together with dividends) that beat the main S&P 500 Index ETF:

Marathon Petroleum (MPC) has led the best way with a complete return above 48%, whereas HF Sinclair (DINO) was the one oil refiner lagging SPY with a 13.86% complete return.

Oil refiners have been among the many strongest performers within the vitality sector over the previous yr.

You may see our full record of almost 250 vitality shares (together with essential monetary metrics like dividend yields and payout ratios) by clicking on the hyperlink beneath:

Given the rally of the oil refiners, buyers ought to be aware that refiners are broadly buying and selling at elevated valuations. Their companies are nonetheless extremely cyclical and subsequently it’s prudent to anticipate their earnings to revert to regular ranges within the upcoming years.

On this article, we are going to examine the anticipated 5-year returns of the 4 main refiners. Anticipated complete return knowledge comes from our greater than 800 shares (and rising) Positive Evaluation Analysis Database.

Desk Of Contents

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Business Overview

All the main U.S. oil refiners have generated optimistic returns over the previous 12 months. There are two main causes behind the spectacular rally of the oil refiners.

First, demand for oil is recovering strongly from the pandemic due to widespread immunity. The truth is, world oil consumption is anticipated by the Vitality Data Administration (EIA) to succeed in its pre-pandemic excessive in 2023.

Furthermore, world provide of refined merchandise has tightened to the acute this yr because of the sanctions of the U.S. and Europe on Russia in response to its invasion in Ukraine. On the time, Russia produced 10% of world oil output and a fair higher quantity of refined merchandise. Consequently, the sanctions have significantly restricted the worldwide provide of gasoline and diesel which has boosted refining margins.

The excessive EPS reported in latest quarters makes oil refiners’ valuations look low cost. Nevertheless, we anticipate refining margins will deflate within the upcoming years because of the cyclical nature of this trade. Consequently, our future anticipated returns are weak.

The foremost 4 U.S. oil refiner shares are mentioned in higher element beneath.

U.S. Oil Refiner Inventory #4: Marathon Petroleum (MPC)

After the acquisition of Andeavor Logistics in October 2018, Marathon Petroleum has turn into the most important U.S. refiner, together with Valero, with 16 refineries and a refining capability of three.1 million barrels per day. It additionally has a advertising system that features ~7,100 branded areas.

As well as, MPC owns MPLX LP (MPLX), a midstream Grasp Restricted Partnership, which has gathering and processing property in addition to pipelines for crude oil and mild merchandise.

In early Might, Marathon Petroleum reported (5/2/23) monetary outcomes for the primary quarter of fiscal 2023. Because of the extraordinarily tight provide brought on by the sanctions of western international locations on Russia, refining margins almost doubled over the prior yr’s quarter, from $15.31 to $26.15.

Supply: Investor Presentation

Due to this fact, regardless of a low utilization charge of 89%, which resulted from upkeep exercise, the refining section grew its EBITDA from $1.4 billion to $3.9 billion and thus the corporate greater than quadrupled its earnings-per-share, from $1.49 to $6.09. Refining margins have remained elevated because of the sanctions of western international locations on Russia. We thus anticipate MPC to submit its second-best earnings-per-share in its historical past this yr.

Because of its unprecedented earnings, MPC raised its dividend by 30% and decreased its share depend by a large 24% final yr. It additionally has one other $9.0 billion for share repurchases, which might scale back the share depend by one other 20%.

However, the inventory is more likely to provide a -6.7% common annual return over the following 5 years, because the 12.8% valuation tailwind and the two.3% dividend are more likely to be offset by the 18% anticipated annual EPS decline.

Click on right here to obtain our most up-to-date Positive Evaluation report on MPC (preview of web page 1 of three proven beneath):

U.S. Oil Refiner Inventory #3: Valero Vitality (VLO)

Valero is the most important unbiased petroleum refiner on the planet. It owns 15 refineries within the U.S., Canada and the U.Okay. and has a complete capability of about 3.2 M barrels/day.

It additionally produces renewable diesel and has a midstream section, Valero Vitality Companions LP, however its contribution to complete earnings is below 10%.

Supply: Investor Presentation

In late April, Valero reported (4/27/23) its monetary outcomes for the primary quarter of fiscal 2023. The corporate loved almost file refining margins within the quarter and posted blowout earnings-per-share of $8.27, which have been greater than 3 instances the earnings-per-share of $2.21 within the prior yr’s quarter.

Notably, the earnings-per-share within the first quarter exceeded the earlier (earlier than 2022) file annual earnings-per share of $7.99, final achieved in 2015.

Click on right here to obtain our most up-to-date Positive Evaluation report on VLO (preview of web page 1 of three proven beneath):

U.S. Oil Refiner Inventory #2: HF Sinclair (DINO)

In March 2022, HollyFrontier (HFC) modified its identify to HF Sinclair (DINO) to mirror its acquisition of Sinclair Oil. The corporate was initially fashioned by the merger of two unbiased U.S. refiners, Holly Company and Frontier Oil, in 2011.

It operates in three segments: refining, lubricants, and Holly Vitality Companions, which is a midstream entity. However, the refining section generated 97% of the overall working revenue in 2022.

On Might 4th, 2023, HF Sinclair supplied to amass the remaining 53% stake in Holly Vitality Companions (HEP) that it doesn’t personal in an effort to enhance the efficiencies of its community of property. The corporate supplied 0.3714 shares of its inventory for each unit of Holly Vitality Companions. Because of the engaging valuation of Holly Vitality Companions, we view the deal as optimistic for HF Sinclair and anticipate it to materialize till the top of the yr.

In early Might, HF Sinclair reported (5/4/23) monetary outcomes for the primary quarter of fiscal 2023. Refining margins remained basically flat sequentially, at blowout ranges, due to the sanctions of western international locations on Russia, which have significantly tightened the worldwide market of oil merchandise. Nevertheless, earnings-per-share dipped from $2.97 to $2.00 on account of deliberate upkeep exercise in refineries.

Click on right here to obtain our most up-to-date Positive Evaluation report on DINO (preview of web page 1 of three proven beneath):

U.S. Oil Refiner Inventory #1: Phillips 66 (PSX)

Phillips 66 operates in 4 segments: refining, midstream, chemical substances, and advertising. It’s a diversified firm with every of its segments behaving in a different way below varied oil costs, within the absence of a extreme recession. In 2022, the refining section was by far probably the most worthwhile section, producing 66% of complete earnings.

Supply: Investor Presentation

In early Might, Phillips 66 reported (5/3/23) monetary outcomes for the primary quarter of fiscal 2023. The impact of decrease volumes on account of turnaround exercise was offset by increased realized refining margins. Consequently, the working revenue of the refining section remained basically flat sequentially, at $1.6 billion. Because of improved margins in chemical substances, adjusted earnings-per-share grew from $4.00 to $4.21 and exceeded the analysts’ consensus by a large $0.65.

Administration acknowledged that the pending acquisition of all of the publicly held frequent models of DCP Midstream is anticipated to shut within the second quarter. This acquisition is anticipated to extend the annual EBITDA of Phillips 66 by about $1 billion.

Click on right here to obtain our most up-to-date Positive Evaluation report on PSX (preview of web page 1 of three proven beneath):

Last Ideas

Because of the tailwind of the financial reopening and their robust enterprise fashions, the Massive 4 main U.S. refiners grown their earnings at a fast tempo. A number of refining shares have outperformed the S&P 500 over the previous yr, which may make buyers hesitant to purchase. Certainly, we at the moment have unfavourable future return estimates for 2 of the main refiners, VLO and MPC.

Phillips 66 appears to have probably the most engaging mixture of valuation, progress prospects, and dividend yield. Consequently, PSX is the inventory more likely to provide the best 5-year return. Traders must also be aware that it’s the solely refiner that’s extremely diversified and might hold thriving even in a downturn of the refining margins. Nonetheless, PSX stays a maintain.

Further Studying

The next Positive Dividend lists include many extra high quality dividend shares to think about: