Oil Refiners: Performing Like Tech Growth Stocks For 2 Decades

by: Geoffrey Caveney


In the oil price crash of 2014-2016 investors noticed that oil refiners such as Valero and Tesoro held steady or gained while crude oil producers crashed.

Oil refiners can be profitable in both bull and bear markets for oil. Over the long run of multiple cycles, refiners can make the biggest gains.

From 1999-2016, Valero and Tesoro stocks have vastly outperformed the likes of Exxon Mobil and Chevron.

Valero and Tesoro have even performed as well as Amazon since 1999, and Amazon has only recently caught up to them over this period.

Oil refiners offer exposure to energy, much less risk than oil exploration and production stocks, and they are even bargains right now after a big pullback over the past year.

Recently, I wrote about engine manufacturer Cummins (NYSE:CMI) and how its stock price has outperformed Amazon (NASDAQ:AMZN) by 30% since 1999. Cummins is not the only hard asset stock that has performed like a high-flying tech growth stock for the past two decades -- The major oil refining companies have seen similar stock price growth over this period.

Many investors began paying closer attention to oil refiners such as Valero (NYSE:VLO) and Tesoro (TSO) during the oil price crash of 2014-2016. That's because their stock prices were holding steady or rising while crude oil producers' stock prices were crashing.

The refiners' business is to process the crude oil and turn it into gasoline and other end products. Their profits are based not on the oil price but on the "crack spread," the difference between the prices of the crude oil they buy and the gasoline they sell. As such, oil refiners can be profitable in both bull and bear markets for oil.

In boom times for oil, refiners get less attention, because more highly leveraged oil producers make more money. But the refiners still do well in these periods due to soaring gasoline prices. And when the oil boom turns to bust, the producers crash, but the refiners' business remains steady because the cheaper crude oil they buy compensates for lower gas prices.

And so, over the long run of multiple boom and bust cycles in the oil industry, it is the refiners whose stocks have made the biggest gains over long periods of time. Here is a chart of the stock prices of Valero, Tesoro, Exxon Mobil (NYSE:XOM), and Chevron (NYSE:CVX) from 1999 to 2016:

Yes, the blue and red lines on top are Tesoro and Valero, and the pink and green lines at the bottom are Chevron and Exxon Mobil.

To be fair, some oil producers such as Occidental Petroleum (NYSE:OXY) have matched the performance of Valero over this long time period, and EOG Resources (NYSE:EOG) has even outperformed the refiners. But many producers such as Anadarko (NYSE:APC) have performed far worse than the refiners, and the producers' business carries far greater risks of total collapse and failure during oil busts.

And here is the comparison of Valero and Tesoro to Amazon stock since 1999:

The Amazon stock boom of the past two years, and the pullback of Valero and Tesoro stock this year, has only allowed Amazon to catch up to the oil refiners over this long term period.


So, if you are looking for an investment that offers exposure to the energy sector, without the risk of highly leveraged oil exploration & production stocks, oil refiners such as Valero and Tesoro are well worth considering. They are likely to offer a greater margin of safety, while still providing a potential upside of huge long-term gains, as the chart above demonstrates.

Moreover, oil refiner stocks are even bargains right now, as they have sold off significantly over the past year as the crack spread pulled back from its 2015 highs. Valero stock is now available at a 26% cheaper price than it was in November 2015, and Tesoro stock is 33% cheaper. These appear to be decent entry points for stocks that you can hold for the long term.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VLO, TSO over the next 72 hours.

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.