Some Oil Refiners are a Great Value Play
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Oil refineries are well positioned to take advantage of heavy oil and the lack of oil transportation infrastructure in the U.S. With low interest rates the cost of debt necessary for capital expenditures has significantly declined. Still, within the industry there are some refiners like Alon USA Energy (NYSE: ALJ) which have high debt loads, low ROI, and should be avoided. Others like HollyFrontier Corp. (NYSE: HFC) have a solid business with reasonable debt levels. As North America's energy portfolio changes and heavy oil continues to grow, the better positioned refiners will be able to provide respectable cash flow and returns.
| P/E Ratio | Yield (%) | ROI | Price to Cash Flow Ratio | Total Debt to Equity Ratio | |
| Alon USA Energy, Inc. ALJ | 30.35 | 1.1 | 2.3 | 4.8 | 2.46 |
| Valero Energy Corp VLO | 10.25 | 2.3 | 7.1 | 5.2 | 0.42 |
| Western Refining, Inc. WNR | 12.68 | 1.3 | 10.1 | 6.7 | 0.49 |
| Cvr Energy Inc CVI | 11.17 | 0.0 | 14.3 | 8.0 | 0.67 |
| HollyFrontier Corp. HFC | 5.20 | 1.6 | 22.9 | 4.5 | 0.24 |
The Stronger Companies
Valero Energy Corp (NYSE: VLO) is America's largest independent refinery with a $16 billion market cap. They also maintain a significant retail distribution network. Recently they have started to look at the possibility of selling off the retail network in order focus on their refining operations. The low P/E ratio of 10.25 looks reasonable considering that the long term average for equities is 15 and the bigger oil majors like ExxonMobil is currently at 9.82 and Chevron is at 8.58. Valero's ROI of 7.1% is not as high as some of the other refiners but their low total debt to equity ratio of .42 is encouraging. Still, there has been a large amount of insider selling recently which hints that investors would be wise to use caution.
HollyFrontier is a special case. The firm was recently formed through a merger. HFC boasts a super high ROI of 22.9% thanks to the firm's ability to refine heavy oil and the fact that their refineries are close to heavy oil supplies. In additon to their super low P/E ratio of 5.2 the total debt to equity ratio is very low at .24. With the $8 billion market cap the firm is not tiny and has the size necessary for significant capital expenditure projects in the future.
The Weaker Options
CVR Energy (NYSE: CVI) is one of the few firms with positive insider trading but this metric should be viewed with caution. Carl Icahn, the activist investor was recently considering taking the firm private but he decided to back off. While Carl Icahn was accumulating shares other senior executives have been decreasing their position. Their free cash flow yield is one of the lowest of the group while the P/E ratio of 11.17 is one of the higher valuations. At the same time their total debt to equity ratio is .67 is second only to ALJ. On a relative basis this firm is one of the more expensive refiners and the insider action gives reason for concern.
Western Refining (NYSE: WNR) is another U.S. based refinery. The company has a healthy ROI of 10.1% and a reasonable total debt to equity ratio of .49. The P/E ratio is higher than that of the majors at 12.68 and insiders have consistently been selling their shares throughout the past year. The negative insider actions coupled with higher valuations relative to their peers is a red flag for this refiner. The industry may be very profitable at the moment but given the volatility of gas prices and the spreads there is cause for concern with the more expensive firms.
Alon USA Energy is one of the weaker refining companies. It has refining operations, a retail distribution network, and an asphalt segment. Basic metrics show that this company is one of the weakest options within the industry. Their ROI is a dismal 2.3% which is very concerning considering that WNR, CVI, and HFC all have an ROI above 10%. The total debt to equity ratio is much higher than their competitors at 2.46. Their free cash flow yield of 17.43% is healthy but it does not make up for the high debt to equity ratio and low ROI. Recently the senior VP of mergers and acquisitions sold $138,200 which only confirms the negative sentiment for the company.
ALJ Free Cash Flow Yield data by YCharts
Conclusion
HollyFrontier is one of the best investments in this market. The low PE ratio and low debt levels coupled with the high ROI and margins from the refinement of heavy oil makes this firm a solid investment. A lack of insider selling is a very positive signal given the larger amount of insider selling in other firms throughout the industry. Valero is another good option but given the lower ROI and insider selling suggests a large amount of caution would be wise. Refining market is not a one sided industry anymore. With the spreads between light and heavy oil and the spread between WTI and brent, refiners are able to become strong investments.
MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Western Refining. Motley Fool newsletter services recommend HollyFrontier. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
