Relaxation Of EPA Mandates Could Power These High Yielding Refiners

| About: Calumet Specialty (CLMT)
This article is now exclusive for PRO subscribers.

Refiners are posting their second strong day in a row Friday on the back of a leaked EPA proposal scaling back biofuel blending requirements for next year.....the second possible piece of good news out of Washington in 48 hours and they say miracles don't happen.

The sector has gone through a very tough last six months as crack spreads have narrowed and these mandated blending requirements have significantly cut into profits. Recently the price of Brent and West Texas Intermediate has started to diverged again which should be good for crack spreads. Combined with a possible relaxation of the renewable fuel mandates next year could goose the prospects of refiners going forward.

Here are two high yielding refiners I currently hold that could see better days ahead:

Calumet Specialty Product Partners (NASDAQ:CLMT) is a leading specialty hydrocarbon producer with refining assets located across the United States. It is organized as a master limited partnership and specializes in the refining of crude oil and other petroleum feedstocks into a myriad of high quality downstream products.

CLMT provides an almost 10 percent yield (9.7%) and has raised its distribution payout by more than 50% since emerging from the financial crisis. Insiders have a huge stake in the firm (More than 17mm shares) and have bought over $100K in new net shares over the past couple of months.

The company has had a difficult couple of quarters as narrowing crack spreads and escalating renewable fuel mandate costs have caused it to miss estimates during the last two quarterly earnings reports. However, the shares are cheap if these trends are now reversing. CLMT sells at just over 5x operating cash flow. S&P has a "Buy" rating and a $39 a share price target on the stock, more than $10 a share above its current price.

PBF Energy (NYSE:PBF) is one of the largest independent petroleum refiners and suppliers of unbranded transportation fuels, heating oil, petrochemical feedstocks, lubricants and other petroleum products in the United States. The company owns three refineries in the Eastern part of the United States with a combined throughput capacity of ~540,000 barrels a day.

Earnings will be down substantially this year due to challenging conditions but current analyst consensus is that earnings will more than double to just under $3 a share in FY2014. The company earned more than $5 a share in FY2012 leaving the stock selling for less than 5x last year's earnings.

The shares yield a robust 5.3% and the company just came public late last year. Trailing operating cash flow amounts to almost one third the company's entire enterprise value. The company's profit margins have been hit harder than most refiners on rising renewable fuel credits and would benefit greatly by any relaxation with EPA mandates. The stock is down some 40% from its highs earlier in the year and offer an attractive entry point for long-term value investors.

Disclosure: I am long CLMT, CVRR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.