3 Refiners With 3 Different Reasons for Investment
Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Refiners were in demand with investors last yea. As a low oil prices pushed profit margins wider, investors reaped the benefits through special dividends and rising share prices.
Now the market has cooled down, and for the bulls it could be a good time to jump back in. But the question is, where to invest?
An MLP with a high yield
What is interesting about Northern Tier Energy (NYSE: NTI) is that the company is not just a refiner; in fact it is hardly a refiner at all. The company has a retail division, which operates 166 convenience stores and 67 franchised convenience stores, primarily in Minnesota and Wisconsin, under the SuperAmerica brand name; in comparison, the partnership has only one refinery.
On an income basis, during the first quarter of this year the company's refinery generated income of $141.8 million, up around 80% from the same period in the previous year. Refining margins were $25.80 per barrel, up 46% from the previous period. However, Northern Tier's retail segment seriously underperformed, generating income of only $600,000 during the first quarter of the year, although this was up from a loss of -$400,000 in the same period last year.
Northern Tier's only refinery is located within easy access of the Minnesota Pipe Line, a 455,000 bpd crude-oil pipeline system that transports Western Canadian and North Dakota crude oil giving the company easy access to North American low-price shale oils. Northern Tier also hold 17% of the Minnesota Pipe Line Company.
With its close proximity to the Minnesota Pipe Line, the partnership is able to achieve wide profit margins on low cost crude from Canada and North Dakota, which translates into shareholder returns far above that of the company's peers. Indeed, the firm has a historic dividend yield of 19% and I believe this is set to continue as more cheap crude flows through the US. Furthermore, the company has notified investors that it is fully compliant with potential emissions regulations that are haunting the industry.
A value investment
HollyFrontier (NYSE: HFC) is potentially one of the best value investments available in the market right now.
HollyFrontier has been sold off after it missed EPS estimates for Q1 this year. The company reported EPS of $1.63 compared to estimates of $1.76, which was entirely down to the company's lower utilization rate of 90% for the quarter compared to estimates of 95%. In contrast, most of the company's peers beat estimates
HollyFrontier's utilization rate was lower due to unforeseen refinery shut-downs that should not be an issue moving into Q2.
Additionally, like Northern Tier, the company is also well positioned to take advantage of cheaper oils from shale fields in the US as well as Canadian crude, which are priced on the WTI benchmark currently offering around a $9 discount to Brent.
Moreover, as I have mentioned above, HollyFrontier is cheap. The company is trading on a historic P/E ratio of around 5.5 and a forward ratio of 9. Meanwhile, the company is sitting on $12.50 per share of cash, indicating that it is actually trading on a forward earnings multiple of around 6.8. Moreover, HollyFrontier has a strong balance sheet, with a debt-to-equity ratio of 0.2 and a current ratio of 2.7.
I have written further about HollyFrontier's value investment potential here.
Bigger is better
The reason for investment into Phillips 66 (NYSE: PSX) is simple; it is a good company at a great price. Indeed, investors have already been handsomely rewarded with the stock up around 80% since its split from parent ConocoPhillips in the middle of last year.
Phillips 66 is the largest refiner in the market and with operations around the world it is also the most diversified. Yet, despite the company's global exposure and diversification, it is still trading at a discount to the majority of its peers in the oil and gas refining and marketing sectors. In particular, the 10-largest companies by market capitalization in the sector trade at an average historic P/E of 11.5, while Phillip 66 trades at a lowly P/E of 8.6.
In addition, the company trades at a PEG ratio of 0.8, indicating that the stock could offer growth at a reasonable price.
Furthermore, Warren Buffett's Berkshire Hathaway is a holder of Phillips 66 shares and there is a strong relationship between the refiner and Berkshire's Burlington Northern Sante Fe unit, which could spur additional buying or even a takeover in the near future.
In conclusion, these three refiners all offer different plays on the same industry. Income investors can look to Northern Tier, value investors can look at HollyFrontier and investors who are adverse to risk can buy into Phillips 66. Personally, I would like to buy all three to gain the most diversification but if I could only buy one, HollyFrontier would have to be my choice for the deep value on offer.
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Fool contributor Rupert Hargreaves owns shares of HollyFrontier. and NORTHERN TIER ENERGY LLC. 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!