The Oil & Gas Refining & Marketing Industry has soared in 2012 as result of falling commodity prices. The S&P Oil & Gas Refining Index has risen over 40 percent in 2012, outperforming the S&P 500 Index by a large margin. The oil refiner companies have financially benefited from the large crack spread of oil.
Crack spread is a term used in the oil industry and futures trading for the differential between the price of crude oil and petroleum products extracted from it - that is, the profit margin that an oil refinery can expect to make by "cracking" crude oil (breaking its long-chain hydrocarbons into useful shorter-chain petroleum products).
The large difference between Brent crude and WTI crude is generally positive for the refining sector and refining stocks, as they have healthy margins today. The biggest adverse risk is the closing of the crack spread that will decrease oil refiner margins. In addition, U.S. oil refiners are cashing in on the lower price for crude in the U.S. versus overseas. Here are two oil refining companies to consider for your portfolio.
HollyFrontier Corp (HFC) has knocked the cover off the ball in 2012. The stock is up 60% year-to date. The Company has paid 3 special dividends in addition to the quarterly dividends. The Company approved an additional $350 million stock repurchase plan. The latest earnings per share in Q2 were $0.13 above the consensus estimate.
HollyFrontier is benefiting from sustained heavy crude oil differentials as well as inland to coastal crude oil differentials helped drive product margins to near record levels. The structural crude advantages currently increasing our operating margins will continue to boost our free cash generation as we go forward. This will allow the return of capital to shareholders to continue. HollyFrontier pays a quarterly dividend of $0.15 for a current dividend yield of 1.51%. However, HollyFrontier has already paid 3 $0.50 special dividends for $1.50 in 2012. Combined with the special dividends, HollyFrontier has a dividend yield of 5.35%.
HollyFrontier is a buy with a 12-month price target of 58. HollyFrontier has an equity summary score of 9.6 out of 10 for a VERY Bullish outlook.
Valero Energy Corporation (VLO) has been rising in price steadily since June 2012. Valero is up 41% in 2012. Valero unveiled plans to potentially break off its retail business from the rest of the company, the latest in a chain of energy companies slimming down assets to sharpen their focus. Valero is working with Credit Suisse Securities to review several options for spinning off its nearly 1,000 retail stations and expects a split could be completed in six months.
Valero reported second-quarter earnings of $831 million, or $1.50 a share, up from $744 million, or $1.30 a share, a year earlier. Revenue increased 11% to $34.66 billion. Analysts surveyed by Thomson Reuters recently expected earnings of $1.43 a share on revenue of $32.62 billion. Valero said refining margins increased as fuel sales ticked upward throughout the U.S., offsetting rising prices for some crude oil types sold in the Gulf Coast region. Valero's refining operating income rose 8.9% as throughput volumes increased 15%. The extra barrels offset a decline in profit margin per barrel, which shrank to $10.63 from $11.41.
Valero's board recently approved a 17% dividend increase. In the past year, Valero has increased its dividend by 250%, moving toward the company's pledge to start returning cash to shareholders. Valero pays a $0.70 dividend for a current dividend yield of 2.37%.
Valero Energy is a buy with a 12-month price target of 58. Valero has an equity summary score of 8.0 out of 10 for a Bullish outlook.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.