The refiners are starting to recover from a swoon that started in late March as a result of concerns of a narrowing crack spread. The sector also needed to consolidate after a huge run in 2012/early 2013. This was a predictable move down with I highlighted in Mid-March when I advocated to lighten up on the refiners. I have been adding to these positions over the last few weeks as the sell-off got overdone and some of the major players in the industry like Valero (VLO) started to report results that beat expectations on the top and the bottom lines. I also like the long term prospects for the refinery sector due to continued domestic oil production expansion as well as huge obstacles (EX, E.P.A.) to building new domestic refinery capacity.
I would still like Valero to continue to bounce back, but my favorite plays in the sector right now are higher yielding refining plays structured as limited partnerships. They are cheap, have increasing operating cash flow and offer huge yields. I own the two companies in this space profiled below for my income portfolio.
Calumet Specialty Products Partners, L.P. (CLMT) produces and sells specialty hydrocarbon and fuel products in North America from a couple of refineries it owns and operates. I first wrote about and purchased Calumet back at $24.50 a share in March 2012. I sold half my position at around $40 when I penned the article encouraging reducing positions on the refiners in Mid-March. It looks like a solid pick up again now that it has fallen around 10% since then.
4 reasons CLMT is a solid income pick up at just over $36 a share:
- The entity yields around 7.5% and it has raised distribution payouts by around 50% over the last couple of years and just announced another 4.6% quarterly hike.
- The company has almost tripled operating cash flow over the past two completed fiscal years and CLMT sells for ~7x operating cash flow.
- Consensus earnings estimates for FY2013 have increased almost 20% over the last three months and the stock trades at just over 8x the current consensus earnings estimates.
- The company, through a partnership, just broke ground on the first new refinery in the U.S. since 1976 in North Dakota with hopes it will resolve the state's diesel demand problem. In addition, company's management states the second quarter is looking strong right now, "the second quarter is off to a good start, supported by strong refining economics and improved utilization at our key production facilities. Beginning in early April, both demand and pricing for products sold in our core markets improved above first quarter levels".
CVR Refining, LP (CVRR) engages in the refining of petroleum in the United States. It owns one oil refinery located near Cushing, Oklahoma; and the Wynnewood crude oil refinery located approximately 65 miles south of Oklahoma City, Oklahoma. The company also owns and operates approximately 350 miles of feeder and trunk pipelines; 125 crude oil transports; 6.0 million barrels of owned and leased crude oil storage capacity storage tanks.
4 reasons CVRR is a great income play at $33 a share:
- CVRR just came public earlier in the year. One of the reasons the stock has a low price is it has not paid a dividend yet. However, it just announced its first quarterly distribution of $1.58 a share. Based on earnings projections and distribution policy, the distribution yield on CVRR for 2013 on current prices should be between 15% to 20%.
- Based on current earnings estimates, CVRR is selling at 5x expected earnings.
- Operating cash flow has risen over 500% over the last two completed fiscal years. The stock sells at just over 5x current operating cash flow.
- Carl Icahn has a majority stake in the parent firm CVR Energy (CVI). CVI spun CVRR out in January and still retains an over 80% stake. Credit Suisse has an "Outperform" rating on the shares.