Not all energy stocks are alike, despite the fact that the sector as a whole has been in free fall since the drop in crude prices. There are companies out there that have not only beaten the sector’s downtrend, but also the S&P 500 expectations. Oil refiners are amongst the ones that have been able to buck the trend. Here are three examples.
Valero (VLO) has been on a tear lately, fueled by low oil prices and rising gas demand. Just this last quarter it reported $1.4 billion in net income which was better even than the second quarter of last year when its earnings more than doubled. The firm has seen its average daily throughput increase from 87,000 barrels per day a year ago to 2.8 million barrels per day in the last quarter. These higher earnings and cash flow are being used to increase its shareholder distributions. Valero plans to return 75% of its net income back to investors through an increased dividend and by buying back almost 10% of its outstanding shares.
Alon USA Energy (ALJ), the nation’s seventh-largest oil refiner, isn’t exactly big in the press, but Alon has managed to outpace the S&P 500 this year. The company uses crude oil as its feedstock, so any drop in crude oil prices automatically increases its profitability. Combined with the fact that it has a strong presence in California, one of the most lucrative gasoline markets in the USA, has allowed the company to have great margins on its retail oil products. It has also increased its dividend by 50% leading to a 3.2% yield on an annualized basis. While sharp increases in crude prices could decimate gains made this year, the company could invest in projects that help it reduce its operating costs and be better prepared for whatever the future holds.
HollyFrontier (HFC) is another refiner that has seen its margins increase as a result of lower crude prices. The company’s management has also been diversifying and growing into higher margin products, with three major projects totaling $365 million over the next two and a half years.
Investors should be cautious in expecting the same results these companies have shown for 2016 because any increase in oil prices will negatively impact their operations. And oil prices have proven once again this last year to be hard, if not impossible to predict. However, as long as oil prices remain weak and demand for gasoline remains strong, these positive returns will continue.