Even though the markets have rallied recently, there are a number of sectors that remain deeply undervalued. One sector that holds tremendous value and future upside is the oil refiners. There is good reason to believe that the oil refiners are at, or close to a bottom. Joe Petrowski, the CEO of Gulf Oil gave his outlook for refiners in a recent CNBC article which stated:
"Refining margins are as low as they’ve been in the last 10 years and I think they’re as low as they’re going to go. We’re seeing refineries shut down here on the East Coast. I think that will portend for higher retail gas prices, at least for the next 90 days.".
With refining margins at ten year lows, and many of the refining stocks bouncing off the 52 week lows, long term investors could be well-served to buy some of the stocks below. The refiners typically do well in the months ahead of the Summer driving season and this might be the perfect time to buy:
HollyFrontier Corporation (NYSE:HFC) is trading around $26.01. HollyFrontier is a petroleum refining company, based in Texas. These shares have traded in a range between $19.92 to $38.90 in the last 52 weeks. The 50-day moving average is $25.80 and the 200-day moving average is $30.39. HFC is estimated to earn about $6.66 per share in 2011, and $4.30 for 2012. This company pays a dividend of 40 cents per share which yields about 1.7%. HollyFrontier seems to be leading the sector higher and has rebounded sharply in recent days. Because of the recent rally, this stock makes more sense on dips. Deutsche Bank has set a $40 price target in their most recent analysis for HFC.
Valero Energy Corp. (NYSE:VLO) is trading at $19.81. Valero is a major refiner of petroleum products and also markets fuel and produces ethanol. These shares have traded in a range between $16.40 to $31.12 in the last 52 weeks. The 50-day moving average is $22.46 and the 200-day moving average is $23.81. VLO is estimated to earn about $4.65 per share in 2011, and $3.93 for 2012. This company pays a dividend of 60 cents per share which yields about 2.9%. Very few companies in the energy sector (or any industry for that matter) sell for just about $20 per share and are estimated to earn nearly $4 per share in 2012. Furthermore, Valero is trading below book value which is $29.81 and the company was able to beat earnings expectations last quarter. RBC Capital Markets recently downgraded the stock from a top pick to a outperform with a $32 price target.
Tesoro Corporation (NYSE:TSO) is trading around $22.60. Tesoro refines and markets oil and gas with about 7 refineries and a number of company-owned retail fueling stations. These shares have traded in a range between $17.43 to $29.61 in the last 52 weeks. The 50-day moving average is $24.45 and the 200-day moving average is $23.76. TSO is estimated to earn about $5.34 per share in 2011, and $3.97 for 2012. Tesoro has a strong balance sheet and a book value of $26.64 per share. This is one of the cheapest refiners in terms of book value and PE ratio, but does not pay a dividend. Still, the stock makes sense to accumulate, especially on dips to about $22, which is where it has found support recently.
Sunoco, Inc. (NYSE:SUN) is trading around $41.39. Sunoco refines and markets petroleum products and also operates metallurgical coke plants and coal mines. These shares have traded in a range between $27.76 to $46.98 in the last 52 weeks. The 50-day moving average is $38.12 and the 200-day moving average is $38.74. SUN is estimated to earn about 7 cents per share in 2011, and $1.86 for 2012. This company pays a dividend of 60 cents per share which yields about 1.5%. Sunoco has also rebounded sharply in the past couple of week. This stock does not appear to have as much upside potential as the other stocks listed here, but buying dips below $38.50, could still lead to strong gains.
The data is sourced from Yahoo Finance.
Disclosure: I am long VLO.