Refiners Beating Slump

July 16th, 2015
in contributors

Investing Daily Article of the Week

by Robert Rapier, Investing Daily

The meltdown in the oil and gas sector has been so pervasive that 113 of 114 stocks grouped under "Oil & Gas Exploration & Production" in the Bloomberg database have a negative 12-month total return. The only exception is Isramco (NASDAQ: ISRL), a small oil and gas producer with properties in the U.S. and off Israel's shores.

Follow up:

But as I like to remind people, the energy sector is very diverse and there are always subsectors that are outperforming not only the industry as a whole but also the broader market averages. In the first half of this year that sweet spot was occupied by the refiners.

Bloomberg's database lists 13 companies or master limited partnerships (MLPs) with crude oil refining operations. Whereas more than 99% of all oil and gas producers presently have a negative 12-month return, only 3 of the 13 refiners (23%) have a negative 12-month return. What's more, all 13 have a positive return for the first half of 2015. The average first half return of the refining group was 24%, compared to the 6.1% return of the Nasdaq and the 0.9% return of the S&P 500.

Below is the complete list of refiners extracted from Bloomberg's database by our proprietary energy stock screening tool. Entries are sorted in alphabetical order and include some valuation and performance metrics of interest to investors:


  • EV = Enterprise Value in billion as of July 2
  • EBITDA = 2014 earnings in billion before interest, tax, depreciation and amortization
  • YTD = Year-to-date total return percentage (including dividends) as of July 2
  • 1 Year = One-year total return percentage (including dividends) as of July 2
  • FCF = Free Cash Flow in 2014 in million
  • YLD = annual yield based on the past 12 months of dividends

Do note that, in the table above, MLPs will tend to trade at different financial ratios than corporations. They will also often have much higher yields, as many are variable distribution partnerships that pay out all excess available cash as distributions. But always keep in mind that a great distribution this quarter can turn into zero distribution the next should economic conditions for refiners worsen.

The biggest first-half winner among the refiners was Alon USA Energy (NYSE: ALJ) with a first half total return of 51%. Alon owns and operates refineries in Texas, California and Louisiana with an aggregate refining capacity of nearly 217,000 barrels per day.

We made a timely call on ALJ at The Energy Strategist, adding it to our Aggressive Portfolio on March 2. While we did not capture the entire 51% year-to-date gain, we are happy with our 40% return in four months.

Our Growth Portfolio, meanwhile, benefited from double-digit gains in Valero (NYSE: VLO), Tesoro (NYSE: TSO), Marathon Petroleum (NYSE: MPC) and Western Refining (NYSE: WNR).

Of course the old adage that past performance isn't an indicator of future results applies. Is it too late in the game for investors to jump on the refining bandwagon?

We believe strongly that there is value left in the group, even though some refiners are now fully valued or overvalued. Join us at The Energy Strategist for up-to-date recommendations on this thriving slice of the energy industry.

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