Refining stocks have had a great run since September. Some names have doubled while others have quadrupled. Investors are still showing interest. Refiners have estimated growth that not only warrants this run, but also substantiates forward earnings. This week the Energy Information Administration reported gasoline supplies fell 5.3 million barrels versus the estimate of 2 million. All of the refiners reacted bullishly. This list of refiners will show how valuation is affected when growth is figured into the equation.
Western Refining Inc. (WNR) owns and operates refineries. Western has benefited from the Eagle Ford. This area has provided it with an influx of cheaper oil. By acquiring the oil cheaper the crack spread widens. Western also has its Yorktown refinery that has been converted to storage. When demand for gasoline and distillates increases, Yorktown can restart operations. Western has 150 retail stores that would benefit as the United States' economy improves. It has beat estimates two out of the last four quarters. Western's business with respect to 2009 EBITDA breaks down to:
2011 Growth Estimate-1800%
Growth Next Five Years Per Annum-100%
PEG Ratio (Five Year Expected)-.09
For a more in depth analysis of Western, please read Bullish on Western Refining as Cheap Domestic Crude Increases Margins .
Tesoro Corporation (TSO) is an operator of seven refineries and over 800 retail stores. Tesoro plans to increase its retail store number to 1200 sometime this year. Tesoro's refineries are located in high margin areas. Its North Dakota refinery is well placed for Bakken oil. Tesoro has decided to increase crude-oil processing capacity at its Mandan refinery. Oil production from the Bakken/Three Forks formations is expected to almost triple by 2013. This is bullish for Tesoro. Tesoro has beat earnings in two of the past four quarters. 2009 EBITDA shows Tesoro's business is:
2011 Growth Estimate-831%
Growth Next Five Years Per Annum-23.4%
PEG Ratio (Five Year Expected)-.51
For a more in depth article please read Opportunity in Tesoro: Aims To Reduce Costs, Increase Shareholder Value.
Valero Energy Corp. (VLO) is the world's largest independent refiner. Its 5800 branded market sites are one of the nation's largest fuel retailers. This company is also one of the nation's largest ethanol producers. This diversified company has lower growth estimates when compared to other refiners, but Valero has less downside and investment grade debt. Valero has removed many of its lagging retail locations. Valero has continued to cut costs and increase efficiencies.
2011 Growth Estimates-77.8%
Growth Next Five Years Per Annum-6.33%
PEG Ratio (Five Year Expected)-1.54
For more information on this company read Valero: Using Market Diversification to increase Growth.
Frontier Oil Corp. (FTO) owns two complex refineries in strategic locations. Pipelines are assessable from the Bakken and Canadian oil sands. Frontier recently announced a merger with Holly Corp. (HOC). Frontier is my favorite refiner in the space, as it is a pure refining play. The combination of these two companies is very interesting. They are the top two with respect to net income per barrel, and lowest debt to capitalization. Frontier's refineries are located to take advantage of Bakken and Niobrara oil production. Frontier's 2009 EBITDA was 100% derived from its refining business.
- P/E Ratio 75.03
Forward P/E 11.21
2011 Growth Estimates-493.2%
Growth Next Five Years Per Annum- (-1%)
PEG Ratio (Five Year Expected)- (-10.38)
For more information on Frontier, please read Frontier Oil Capitalizing on Bakken and Niobrara.
Alon USA Energy Inc. (ALJ) differentiates itself through its asphalt business. It produces several types of asphalt for roads and roofing. Alon has successful integration of asphalt, retail, refineries, pipelines, large terminals and marketing. Alon's business covers states from Washington to California and reaches as far as Louisiana. The company's 2009 EBITDA shows Alon's revenues were 78% retail, and 22% asphalt.
Forward P/E Ratio-63.6
2011 Growth Estimates-104.6%
Growth Next Five Years Per Annum-50%
PEG Ratio (Five Year Expected)-2.21
CVR Energy Inc. (CVI) refines and markets transportation fuels, but also markets nitrogen fertilizer. CVR is differentiated through its fertilizer business. CVR maintains it has a significant margin advantage of fertilizer production. It can produce fertilizer for less than what a competitor can using natural gas. Both of CVR's businesses look good going forward. The company's 2009 EBITDA shows refining is 67% and fertilizer is 33%.
2011 Growth Estimates-350%
For a more detailed analysis of CVR please read CVR Energy May Be the Best of Both Worlds.
Holly Corp. (HOC) currently operates three refineries. It provides service to the Rockies, Midcontinent, and Southwest United States. Holly is currently merging with Frontier, which should create some interesting synergies. It also completed the purchase of its Tulsa refinery. The Tulsa refinery was previously two facilities which are now merged into one unit. This will create further synergies. Holly Energy Partners (HEP) pipeline blends well into Holly Corp's refinery business. Holly has conservative debt and a strong balance sheet.
Forward P/E Ratio-11.82
2011 Growth Estimates-147.9%
Growth Five Years Per Annum-(-3.7%)
PEG Ratio (Five Year Expected)-(-3.18)
For a more in depth description please read Holly Corp's Peer Advantage: Increased Production in Domestic Shale Oil.
Delek U.S. Holdings (DK) operates a refinery, has 34.6% interest in a second refinery and 420 retail locations. It has recently reported an increase in the distillate crack spread, increasing margins. Its retail locations are beginning to increase sales. Ethanol economics are also improving. At the end of 2009, Delek reported refining totaled 61% of its business. For a detailed analysis of this company please read Delek U.S. Holdings: A Good Buy on Pullbacks.
In summary, I am bullish on the refiners. Refiners are up big since September. Not only is the economy improving, but less expensive shale oil is increasing crack spreads. When growth is mixed into the calculation, many of these names have value. Companies with a one year PEG Ratio could double and still be considered inexpensive. Buying Holly Corp (HOC) may be the best way to play this sector as its upcoming merger will create synergies. Western Refining (WNR) also look very inexpensive with respect to its five year expected PEG Ratio. CVR Energy is an interesting play on valuation and fertilizer demand. These names should continue to grow after the worst recession in recent memory. Until fundamentals change, these names are a buy.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WNR, HOC, FTO, TSO over the next 72 hours.
Additional disclosure: All valuation and growth estimates were taken from Yahoo Finance. This information is to be used as a list of reference with respect to stocks in the refining space, and is not a buy recommendation. I many buy any of these names depending on current fundamentals. The positions that I may buy in the next 72 hours are the stocks I believe have the best short term possiblities for appreciation.