Gasoline prices are a hot topic these days. The talking heads haven't allowed a broadcast hour to pass by without some comment on the subject. I have selected 5 stocks in the oil and gas refining and marketing industry whose share prices have been trending up since the beginning of 2012. They are Valero (VLO), Tesoro (TSO), Hess (HES), Marathon (MRO), and HollyFrontier (HFC), and we'll look at them in that order. The following analysis will focus on the fundamentals of each stock, upside or downside catalysts at play and my thoughts on each equity.
Valero has seen a share price increase of around 70% since the beginning of 2012. With a market cap of around $16 billion and shares trading at about $29, this stock is moving rapidly to its 52 week high. Valero has a price to earnings ratio of 7.77, a price to earnings growth ratio of 0.66 and a price to book of 0.94. Valero's return on equity is 13.32% and quarterly year-over-year revenues are a wholesome 57%. Quarterly year-over-year earnings are not reported, but a glance at the annual income statements reveals that Valero's 2011 earnings performance is the highest in its past three years of operation. The debt to equity and current ratios are 47.07 and 1.26 respectively. Valero also pays shareholders a reasonable dividend yield of 1.40% amply supported by a modest 8% payout ratio.
Positive catalysts include Valero's partnership with Kinder Morgan (KMP) to construct a pipeline from its St. Charles refinery in Norco, Louisiana to a Collins, Mississippi hub. The 140 mile pipeline will transport gasoline and diesel fuel for distribution throughout the South. I like Valero, even though it has burned through a lot of cash over the past few years to increase refining capacity. Many argue that lack of refining capacity is one of the main drivers of rising fuel prices.
If that is the case, and to some extent I believe it is, Valero is well positioned to earn some serious cash over the next several months as refiners push to increase supply. I suggest this stock is worth your consideration for a couple of reasons. First, the price to book and price to earnings growth ratio suggest that share price has room to increase significantly. Second, the low payout ratio gives the board ample opportunity to consider a dividend increase.
Tesero has seen its share price grow by just over 20% since the start of this year. Tesoro trades at around $30 per share and has a market cap just beyond the $4 billion mark. Its fundamentals are pretty solid. Tesoro is cheap at 7.73 times earnings, has a great price to earnings growth ratio of 0.52 and a Buffett pleasing price to book of 1.10. It also reports a solid return on equity of 15.65%, quarterly year-over-year revenue growth of 40.60% and annual income statements that show net income at an all time high as compared to the past two years. Debt to equity and current ratios are strong at 42.76 and 1.28 respectively. The stock offers no dividend. One significant downside catalyst for Tesoro is the looming strike threat. I recommend waiting on the sidelines until this is resolved.
Hess is trading at around $63 per share and enjoys a market cap of about $21 billion. Hess has shown a less robust share price appreciation in the same period of about 7%. The fundamentals reflect the reasons why this is the case. Although trading at just 7.61 times trailing twelve month earnings, the price to earnings growth ratio of 1.16 and price to book of 1.18 is arguably less attractive than those of Valero and Tesoro.
Return on equity is not so strong in terms of industry averages, reported at 9.47%. Quarterly year-over-year revenue growth is weak at 7.90% and net income has been on the decline for the past 3 fiscal years. Hess' debt to equity and current ratios look good at 32.58 and 1.03 respectively. Hess pays a small dividend yielding one-half of one percent against a payout ratio of 8%.
A possible upside catalyst for Hess is its recent roll-out of a comprehensive energy solutions unit, but frankly, I see it as yet another diversion in an already diverse enterprise with insufficient focus on its core business. I believe Hess' best days are behind it and I would remain on the sidelines, at least until it decides what it wants to be when it grows up.
Marathon has seen its share price rise just over 9% since the start of this year. Marathon Oil is trading at about $33 and has a market cap of around $23 billion. Marathon's price to earnings, price to earnings growth ratio and price to book are 7.53, 1.06 and 1.38 respectively. Its return on equity is 8.34%. Quarterly year-over-year revenue and earnings growth clock in at 8.40 and -22.20 respectively. Annual income statements show positive year-to-year earnings growth in the last 3 years. The debt to equity and current ratios stand at 28.06 and 0.73 respectively.
I like Marathon's heavy involvement with LNG (liquefied natural gas). I see this cleaner burning fossil fuel as the wave of the future. It is the most logical bridge to solar, wind and other alternative energy solutions. Perhaps the strongest upside catalyst for Marathon was Credit Suisse Group's (CS) recent target upgrade for Marathon to $42. That said, I recommend this stock for your consideration.
HollyFrontier is perhaps the crème de la crème in today's group. HollyFrontier has seen about a 40% increase in share price since its January 3rd close. Trading at about $36 and with market capitalization nearing $7.5 billion, it has some truly remarkable fundamentals. Price to earnings is 5.59. The price to earnings growth ratio is 0.24 and price to book is 1.41. Shaping up to be a value stock? Return on equity is a stunning 29.75%. Quarterly year-over-year revenue and earnings growth are 124.80% and 1,417.60% respectively. HollyFrontier's debt to equity and current ratios are 20.82 and 1.77 respectively. The share offers a dividend yielding 0.10% against a payout ratio of 21%.
Continued strong earnings open the possibility of greater dividends to shareholders. Its geographical placement gives it a competitive advantage among other refiners and bodes well for earnings as production in the region ramps up. I urge you to read this excellent article which highlights the attributes of HollyFrontier in a most persuasive manner. I only differentiate my view from author David White's on one point; I suggest you buy it now and not wait for a pullback. If there is a pullback, I don't think it will be a significant one.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.