Don't Overlook This Superior Oil Refiner
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As investors, sometimes we lose sight of the basics. I want to remind all the fans of ‘big oil’ that, without refineries, crude oil is largely a useless commodity. Anyone needing proof of that needn’t look further than Iran. To quote Wikipedia, “Oil reserves in Iran, according to its government, rank third largest in the world at approximately 150 billion barrels,” yet it was the second largest importer of gasoline in the world because it lacked refining capabilities. Warren Buffett seems to have recognized the crucial role refining plays in the oil industry and has added Valero Energy (NYSE: VLO) to his portfolio and increased his holdings in Phillips 66 (PSX) above and beyond those he received in the ConocoPhillips (COP) spin-off, according to the recent 13F filing with the SEC.
Using Valero as the benchmark (considering it passed Buffett’s scrutiny), I will examine how Tesoro (NYSE: TSO) and World Fuel Services (NYSE: INT) match up and what catalysts are in play for each.
Fundamentals
Valero trades at around $29 and has a market capitalization of about $16 billion. Trailing twelve month price to earnings is reported at 9.77, with a 1.46 price to earnings growth ratio and a price to book of 1.01. Return on equity is 10.1%. Valero’s quarterly year-over-year revenue and earnings growth are 10.8% and 11.7% respectively. Financial strength and soundness, based on the debt to equity ratio of 47.54 and the current ratio of 1.30, meet or exceed the expectations of the value investor. The stock pays shareholders a dividend yielding 2.2% against a payout ratio of 17%.
Tesoro trades at around $39 and has a market capitalization of about $6 billion. Trailing twelve month price to earnings is reported at 8.42, with a 0.88 price to earnings growth ratio and a price to book of 1.31. Return on equity is 16.67%. Tesoro’s quarterly year-over-year revenue and earnings growth are 1.5% and 77.5% respectively. Financial strength and soundness, based on a debt to equity ratio of 38.48 and a current ratio of 1.41, meet or exceed the expectations of the value investor. The company's board of directors recently authorized a share repurchase program of $500 million and a $0.12 dividend to be paid on September 14th to shareholder sof record on August 31st.
World Fuel Services trades at around $36 and has a market capitalization of about $2.6 billion. Trailing twelve month price to earnings is reported at 13.24, with a 1.27 price to earnings growth ratio and a price to book of 1.85. Return on equity is 15.62%. World Fuel Services’ quarterly year-over-year revenue and earnings growth are 10.5% and -3.2% respectively. Financial strength and soundness, based on the debt to equity ratio of 23.07 and the current ratio of 1.58, meet or exceed the expectations of the value investor. The stock pays shareholders a dividend yielding .4% against a payout ratio of 5%.
Now that we have looked at the fundamentals, lets explore each company’s catalysts. Obviously, all the press given to addition of Valero to Buffett’s portfolio will serve as something of a catalyst. It may be the reason JPMorgan Chase initiated coverage on the stock or it may not. Either way, coverage by a heavyweight like JPMorgan is a catalyst. Valero recently completed the purchase of the Pembroke refinery in Wales, and as a result, its marketing and logistics assets throughout the U. K. and Ireland.
Tesoro will also benefit from JPMorgan initiating coverage. In what can only be described as remarkable coincidence, Tesoro is also acquiring a refinery. It will acquire BP’s (BP) California refinery and the 800 gasoline stations that come with it. This acquisition represents almost one-fourth of California’s refining capacity.
World Fuel Services also seems to be on the acquisition trail, recently signing a definitive agreement to purchase certain assets of CarterEnergy.
With many of you thinking about where to place your energy bets as the winter heating season approaches, these 3 companies should be on your list. As I said earlier, I will use Valero as the ‘benchmark’.
Tesoro stacks up fairly well against Valero in terms of price to earnings, price to earnings growth and price to book. It looks much better than Valero in terms of return on equity, quarterly year-over-year earnings growth, debt to equity and current ratio. Tesoro's weakness is confined to quarterly year-over-year revenue growth. Revenue might well resolve itself with the acquisition of the Pembroke.
As for World Fuel Services, its price to earnings ratio is the least attractive of the bunch, but not a deal breaker. Its price to earnings growth ratio and price to book are less favorable as well, but within the limits of acceptability for majority of value investors. Among the 3, World Fuel Services has the best looking debt to equity and current ratios, and falls just short of Tesoro in return on equity. The small dividend yield is little more than a tease. The real deal breaker here, has to be the negative quarterly year-over-year revenue growth. The pending acquisition doesn’t seem all that attractive and non-organic growth is not necessarily the right answer to World Fuel Services’ revenue shortfall.
While I believe all three companies to be a viable investment, my favorite against the benchmark, in case you haven’t guessed, is Tesoro. The deciding factor for me, and I will share that with you now, is Tesoro's superior net earnings per employee which stand at $122,963, compared to Valero at $75,000 and World Fuel Services at $109,972. I don’t often quote this statistic, but it is a favorite of mine when all else is roughly equal. I think it speaks volumes for the quality of not only management, but the workforce as well.
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