High-Yield Refiners Are Killing It

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 |  Includes: CLMT, CVRR
by: Bret Jensen

Summary

Refiners have delivered extremely solid results this quarter, and as a whole, are in rally mode.

Especially strong have been several refinery plays with high yields in addition to good earnings results.

Despite a rally, these stocks have very reasonable valuations, solid tailwinds and remain good positions for income portfolios.

Yesterday, I did a piece on refiner PBF Energy (NYSE:PBF), a high-yield refining play that was soaring after crushing earnings expectations for the second straight quarter. This followed better-than-expected results from the biggest refinery stocks like Valero (NYSE:VLO) and Phillips 66 (NYSE:PSX).

Today, I am discussing CVR Refining (NYSE:CVRR), an energy partnership in the refinery space, which reported stellar results and is rallying in trading Thursday (May 1, 2014). This entity reported that earnings came in at $1.80 a share, double the consensus estimates of 90 cents a share. Revenues came in over $300 above the consensus baseline of ~$2.07B.

The company crushed revenue expectations last quarter as well, coming in more than $500mm above estimates. I still like the sector, as the explosive growth of domestic oil production should continue to keep the spread between WTI and Brent prices wide. In addition, a lot of shale regions have oil prices much lower than the WTI list price. Increasing exports and reduced renewable biofuel energy mandates from the EPA (one of the few positive decisions for business from this agency over the past half dozen years) in 2014 are also nice positive catalysts.

CVR Refining is still attractive here, as it has more than a 7% distribution yield even after the recent rally in the stock. In addition, I would expect myriad upward revisions to FY2014 earnings estimates based on this blowout quarterly report. As it was before the report, CVRR was going for just 7x forward earnings.

We have seen most of the refinery companies deliver quarterly reports this earnings season. However, Calumet Specialty Products Partners (NASDAQ:CLMT) delivers results next week. Given that almost every refiner has beaten estimates, and most by substantial amounts, I would expect it to also deliver earnings that beat the consensus.

The shares pay a robust 10% distribution yield. Calumet also has several big projects that will come online by 2016 that should add some ~$200mm to EBITDA. This is a big hike for a company with a market capitalization of just under $2B.

After doing just over breakeven with earnings in FY2013, the current consensus has Calumet earning ~$1.50 a share in FY2014. Current expectations also call for over $2 a share of earnings in FY2015. The stock has a very low five-year projected PEG (1.01) for such a high yielder.

Both of these high-yield refiners have had nice moves in 2014, even as the overall market has remained relatively flat, albeit more volatile, than 2013. Both have reasonable valuations as well as some secular tailwinds, and they will remain core positions in my income portfolio for the foreseeable future.

Disclosure: I am long CLMT, CVRR. 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.