How To Profit From The Keystone Pipeline Decision

Includes: HFC, TRP, VLO
by: Bret Jensen

President Obama denied the application for the building of TransCanada's (TRP) Keystone XL Pipeline on Wednesday. I would love to get into the politics and economic myopia that were behind this decision. However, Seeking Alpha is not the forum for that so I will let T Boone Pickens' comments on the development speak for themselves.

More important for investors are the ripple effects this will have on the energy industry and how to profit from them. Obviously this will have negative impacts on TransCanada given the amount of effort they put into this initiative. I also believe this will help reverse the recent narrowing of the spread between Brent and WTI oil which should help the refiners. Two I like here based on their rock bottom valuations as well as horrid investor sentiment right now are HollyFrontier (HFC) and Valero (VLO).

HollyFrontier - "HollyFrontier Corporation operates as an independent petroleum refiner and marketer in the United States. It produces light products, such as gasoline, diesel fuel, jet fuel, and other specialty products. The company operates refineries in Artesia, New Mexico; Tulsa, Oklahoma; Woods Cross, Utah; and El Dorado, Kansas, as well as in Cheyenne, Wyoming". (Business description from Yahoo Finance)

4 reasons Holly is a solid long term value at $28 a share:

  • The stock is significantly under analysts' price targets. Credit Suisse has an "outperform" rating on Holly as well as a $47 price target on the stock. S&P has HFC as a "Strong Buy" with a $35 target.
  • The stock is selling at the very bottom of its five year valuation range on a P/E and P/B basis. It also yields 1.4%.
  • The merger of Holly and Frontier over the summer has resulted in the combined companies' best gross refining margins in 15 years.
  • The stock is cheap at just over 5 times operating cash flow and under 5 times trailing earnings. Several insiders have picked up new shares over the last four months as well.

Valero Energy - "Valero Energy Corporation operates as an independent petroleum refining and marketing company. The company operates through three segments: Refining, Retail, and Ethanol". (Business description from Yahoo Finance)

4 reasons Valero is a long term bargain at $23 a share:

  • It has one the best yields in the refinery space at 2.9%.
  • Valero is selling near of the bottom of its five year valuation range based on P/E, P/B, P/CF and P/S.
  • The median analysts' price target on VLO is $29, Credit Suisse has a price target up at $40 and the stock is an "outperform" at RBC Capital Markets.
  • The stock is cheap at less than 3 times the $8.64 a share it earned in FY2006 during the last peak of its earnings cycle. It also sells for less than three times its trailing annual operating cash flow.

Disclosure: I am long (VLO).