U.S. based refiners have benefited greatly over the past half dozen years, as a huge energy boom has taken place in this country, resulting in huge increases in oil and other energy production, reducing refiners' input costs and improving margins. This is a secular trend that should last many, many years.
Although the refinery sector is very cyclical due to volatile crack spreads, it has several positive features besides the domestic energy boom. No major refinery has been built in this country since the 70s, and environmental regulations make this obstacle very difficult to overcome, limiting new capacity. In addition, exports are starting to take off, and with the right legislative support, could accelerate even further.
This week, two of the refiners in my portfolio received some positive news.
The largest North American refiner, Valero Energy (NYSE:VLO), received a very nice write up in Barrons this week. The magazine piece stated Valero could have more than 30% upside due to a variety of factors. It calls the company the "pick of the litter" in the refinery segment. It is practically "printing money" by taking lower cost U.S. oil inputs and exporting an increasing amount of its refined products overseas. In addition, the company has little debt, and there is a good possibility that buybacks get accelerated in the near future.
Earnings should increase by more than 30% in FY2014 over last year's levels, according to the current consensus. EPS estimates for FY2014 have increased almost a buck a share over the past three months. The shares are cheap at 9x this year's expected earnings. Falling corn prices should help Valero's ethanol business. The stock has a five year projected PEG of under 1 (.86) and pays a dividend yield near two percent (1.9%).
Calumet Specialty Products Partners (NASDAQ:CLMT). Calumet is organized as a limited partnership and produces specialty refined hydrocarbon products in several facilities with a ~160,000 barrels per day of capacity.
The company announced this week that it has entered into a definitive agreement to acquire ADF Holdings, Inc. on a debt-free basis for total cash consideration of approximately $235 million. This will make Calumet well-positioned to be one of the leading suppliers of drilling fluids to the domestic E&P industry. This acquisition will increase sales in a business that generates consistent cash flow with limited ongoing capital investment.
I would look for analysts to up their revenue and earnings estimates for Calumet over the next few weeks adjusting for this acquisition. This should be positive for the shares. Before the acquisition, the consensus on Calumet had the company earning over $1.40 a share in FY2014 and over $2 a share in FY2015 after doing just better than breakeven in FY2013.
The shares yield almost eleven percent (10.8%) and Calumet has raised its quarterly payout consistently since 2008. CLMT is priced at just over 12x FY2015's earnings estimates. The company has approximately $500mm in new projects that should be completed by early 2016, which should boost EBITDA by another $190mm to $215mm when done.
Disclosure: I am long CLMT, VLO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.