Refinery stocks have been on a tear for the past year. The refiners have enjoyed profits from the crack spread, and gasoline and heating oil being priced more off the higher value Brent crude oil rather than West Texas Intermediate oil. The spread between Brent and WTI was at one time over $25. That spread has come in to $10. Now that the spread has tightened, is it time to book profits in the refiners and look at another sector?
The second item that we must consider in looking at this sector is the proposed EPA regulations on pollution standards for gasoline. The EPA is proposing that the sulphur in gasoline be reduced from 30 parts per million to 10 parts per million. The American Petroleum Institute estimates that if these regulations were instituted, it would cost the refining industry $10 billion upfront plus $2.4 billion annually in compliance costs.
Valero Energy Corporation (VLO) - Dividend Yield: 1.90%
Valero is the largest independent refiner in the United States. Valero owns and operates 16 refineries throughout the United States, Canada, UK and Caribbean along with 10 ethanol plants. Valero is in the process of spinning off its retail business.
From a valuation perspective, Valero has a forward P/E of 7.13 and a PEG ratio of 0.66. Refining has overall very low margins, and Valero's operating margin is only 3.66%. Valero has $1.72 billion in cash to $7.05 billion in debt and an overall market cap of around $22.81 billion. The payout ratio on the dividend is only 17%. The stock is up 65.50% in the past year.
Of all the refiners, Valero had some of the most hedge fund interest going into 2013, with 47 hedge funds long the stock. Most interesting, however, is that there are no big-name billionaire hedge owners with sizable positions in the stock. Valero's largest hedge fund owner by market value is Arrowstreet Capital, and East Side Capital is second. Other notables is Carlson Capital, AQR Capital and Taconic Capita (check out other hedge funds loving Valero).
Tesoro Corporation (TSO) - Dividend Yield: 1.50%
Tesoro owns 7 refineries in the western United States. Those refineries have a crude oil capacity of 675,000 barrels per day. The company also operates 1400 branded gasoline stations with 595 of those operating under the Tesoro, Shell and USA Gasoline names.
In terms of valuation, Tesoro trades with a forward P/E of 8.53 and has a PEG ratio of 0.70. Tesoro has a higher operating margin than Valero at 5.19%. The company is also less leveraged with cash of $1.64 billion and debt of $1.59 billion. The dividend payout ratio is only 5%. The stock is up 112.18% in the past year.
Although Tesoro did not have as much hedge fund interest as Valero going into 2013, with only 32 hedge funds long the stock, this was a 10% increase from the third quarter. Most notably, billionaire Dan Loeb's Third Point had the largest position worth close to $161 million and making up 2.9% of its total 13F portfolio (check out Loeb's cheap stock picks).
CVR Refining, LP (CVRR)
CVR Refining owns and operates 2 refineries in Oklahoma. CVR also owns and operates 350 miles of feeder and trunk pipelines; 125 crude oil transports; 6 million barrels of owned and leased crude oil storage tanks; and a 145,000 barrel per day pipeline from its tank farm to one of its refineries. Fundamentally the stock has a forward P/E of 4.67. Operating margins are among the highest of the refiners at 8.67%. On the balance sheet there's $153.18 million in cash and $773.17 million in debt. The company currently doesn't pay a dividend.
Marathon Petroleum Corporation (MPC) - Dividend Yield: 1.70%
Marathon owns and operates 7 refineries on the Gulf Coast and in the Midwest. The company also has interests in 8,200 miles of pipelines, 4,964 Marathon branded retail outlets and 1,464 convenience stores. The company was spun off from Marathon Oil in July 2011.
From a valuation standpoint, Marathon has a forward P/E of 8.23 and a PEG ratio of 0.69. Operating margins come in at 6.72%. The company has $4.86 billion in cash to $3.36 billion in debt. The dividend payout ratio is only 12%. The stock is up 97.19% the past year.
Marathon also had notable hedge fund interest, with 42 hedge funds bullish the stock, including its top hedge fund owner, D. E. Shaw, having a $227 million position (check D.E. Shaw's bullish picks)
HollyFrontier Corporation (HFC) - Dividend Yield: 2.50%
HollyFrontier has 5 refineries in the United States with a processing capacity of 443,000 barrels per day. HollyFrontier is the result of the merger between Holly Corporation and Frontier Oil in July 2011. In terms of valuation, HollyFrontier trades with a forward P/E of 8.56. Operating margins are among the highest in the sector at 14.36%. The company has $2.39 billion in cash on the balance sheet versus total debt of $1.34 billion. The dividend payout ratio is 37%. The stock is up 52.23% in the past year.
Western Refining, Inc. (WNR) - Dividend Yield: 1.50%
Western Refining operates in 3 segments of the refinery business - refining, wholesale and retail. The company owns and operates 2 refineries. The company operates 222 retail stores in Arizona, Colorado, New Mexico and Texas; a fleet of truck transports; and a wholesale operator that serves Arizona, California, Colorado, Nevada, New Mexico, Texas, Maryland and Virginia.
From a fundamental perspective, Western Refining trades with a forward P/E of 8.22 and a PEG ratio of 0.47. Operating margins come in at 7.47%. The balance sheet has cash of $453.97 million and total debt of $510.02 million. The dividend payout ratio is high at 74%. The stock is up 67.57% in the past year.
As you can see from above, all have had impressive runs over the past year. I think the proposed regulations from the EPA (whether they happen or not) should give investors reason enough to book their profits. I think the overhang from the EPA isn't going to go away and that the stocks have further room to fall. A lot of money has been made in the sector over the past year, and I see money coming out of the sector with the EPA uncertainty. Also taking into account the crack spread not being as favorable to refiners, and I believe it's time for investors to move on for now.