Filling Up Your Portfolio

Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Over the past twelve months, the oil and gas refiners have been filling up portfolios with growth in their stock prices. All the major refining and marketing companies are up over 50% during the past twelve months, these include Phillips 66 (NYSE: PSX)Marathon Petroleum (NYSE: MPC) and Valero (NYSE: VLO)

The refining companies could continue their solid outperformance over the interim. The Energy Information Administration estimates that oil production from shale plays will increase at a compound annual growth rate of nearly 2% from 2011 to 2040. 

Profits in spin-offs 

Phillips 66 was spun-off from ConocoPhillips in 2012, and is now one of the largest independent refiners in the U.S. Phillips 66 focuses on downstream operations, which includes refining and marketing, midstream and chemicals. The refiner also pays a 2.1% dividend yield. 

The Phillips portfolio includes 15 refineries with a net crude oil capacity of 2.2 million barrels per day, which is close behind the output that market-leader Valero generates. Its refining and marketing segment accounts for over 80% of revenues, with chemicals accounting for 20%, which is in line with the revenue breakdown at Valero. 

Although its dividend yield is only around 2%, Phillips is a big believer in buying back shares. The company announced a $1 billion buy back that adds to its $1 billion program that it implemented back in August 2012. 

Marathon Petroleum is the fourth largest domestic refiner, having a capacity of over 1.7 million barrels per day. The refinery company is the 2011 Marathon Oil spin-off with a focus on the Midwest and Gulf Coast. Marathon owns six refineries in the U.S., with an aggregate crude oil refining capacity in excess of 1.1 million barrels per day, well below its Phillips 66 and Valero peers. 

Marathon also gets over 90% of its revenue from the refining and marketing segment, while its Speedway segment generated 5.5% and pipeline transportation 3.8%. Its 90% exposure to the refining segment is above its peers, which is around 80%.
 
However, all these dissimilarities to Phillips and Valero are a positive. Marathon acquired BP's Texas City refinery, which is one of the largest complexes in the country. The project completion will add an extra 80,000 barrels a day of heavy oil processing capacity.

Marathon also has one of the best balance sheets in the industry. The company has nearly $5 billion in cash and a debt to capital ratio that's below 25%.

The leader

Valero is the world's largest independent refiner, owning 15 refineries in the U.S., Canada, and the United Kingdom. Valero's first quarter 2013 refinery throughput volume averaged an impressive 2.5 million barrels per day, up 0.4% from the 2012 first quarter. Valero's biggest segment is the Gulf Coast. This area churned out some 1.5 million barrels per day during the quarter. 
 
The refinery company pays a 2% dividend yield. The big news for Valero is its spin off of its retail business. Back in May, the company completed its plans to spin off 80% of the outstanding shares of its retail segment, CST Brands. This should allow the company to focus on its refining business.

The company also plans on selling off its remaining 20% stock over the next year and a half, which will boost liquidity further. Other big tailwinds for Valero includes a number of new projects, including its Parkway Pipeline project with Kinder Morgan Energy Partners and the recently completed Montreal product pipeline. Both projects are expected to be accretive to 2013 earnings. 

Hedge trade

Heading into the second quarter, a total of 48 of the hedge funds were long Phillip 66. This includes mega-billionarie Warren Buffett's Berkshire Hathaway, with a $1.9 billion position. (Check out Buffett's high upside picks.)

Meanwhile, Valero had the most hedge fund interest with a total of 56 of the hedge funds long the stock. Andreas Halvorsen's Viking Global had the largest position among major hedge funds, worth some $305 million. (See Viking's cheap stocks.)

Bottom line

The downstream oil/gas business gets little appreciation given its relatively "low" dividend yields when compared some of the major integrated oil/gas companies. However, the industry's above-par expected growth is often overlooked.

Phillips is expected to grow EPS at an annualized 10.8% over the next five years, while its former parent ConocoPhillips has a 3.4% expected growth rate. Meanwhile, Marathon Petroleum is expected to grow at 11.2%, versus former parent Marathon Oil's 5.3%. 

Of the major refiners, I tend to like Valero the best, being the market leader and also having recently spun-off its retail segment -- allowing the company to better focus on refining. But both Phillip and Marathon also appear to be solid bets, while Phillips has impressive output and Marathon has a strong balance sheet. 


Marshall Hargrave owns shares of Marathon Petroleum. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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