Refineries Offer Compelling Values

 | Apr 30, 2012 | 12:30 PM EDT
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Refinery stocks have recovered smartly since the start of the year but have pulled back over the last month or so. This pullback may be a good opportunity to establish some positions in this sector, as the area offers compelling valuations and has had some positive news recently:

  • According to the Department of Energy, the U.S. has recently become a net exporter of gasoline for the first time since 1949.
  • The number of miles during the domestic summer driving season is expected to tick up slightly in 2012 from 2011.
  • On Friday, Dahlman Rose initiated most of the Independent refiners as a Buy, stating that "the North American upstream renaissance continues to provide beneficial effects, setting up for a potential long-term advantage."

The sector has numerous bargains in the sector, and here are three that investors should consider:

Tesoro (TSO) is one of the largest refiners in the U.S. It owns seven refineries that have capacity of more than 650,000 barrels a day. Tesoro provides great value at under $24 a share, for these reasons:

  • The stock is selling for just over 6x forward earnings, a significant discount to its five-year average (18.2).
  • The company sells for just 89% of book value and 11% of annual revenues and has a low five-year projected PEG (0.50).
  • Insiders have been net buyers of the shares over the last nine months, and the stock sells at just 5x operating cash flow.
  • Consensus earnings estimates for fiscal 2012 and 2013 have moved up over the last two months. In addition, among the ten analysts who cover the stock, the median price target on Tesoro is $31.50 a share. Credit Suisse has a $35 price target and an Outperform rating on the stock.

Marathon Petroleum (MPC) represents the refining and marketing assets that used to be part of Marathon Oil (MRO). It owns six refineries, more than 5,000 gas stations and some 8000 miles of various pipelines

Here are four reasons why Marathon Petroleum is a compelling bargain at $41 a share.

  • Consensus estimates for fiscal 2012 and 2013 have moved up substantially for Marathon Petroleum over the past three months.
  • The stock yields 2.4% and has already increased its dividend payout once since it became an independent entity in 2011. Given its robust cash flow and low payout ratio (under 20% of earnings), I would look for consistent dividend growth in the future.
  • The company is also using its cash flow to buy back shares. Management is committed to buying back 15% of its float over the next two years. This is one of the primary reasons Credit Suisse has an Outperform rating and a $60 price target on MPC.
  • The stock is cheap at just over 6x earnings and has a low five-year projected PEG (0.26).

HollyFrontier (HFC) is as an independent petroleum refiner with five refineries and more than 400,000 barrels a day of refinery capacity.

Here are four reasons why HollyFrontier should have upside from just over $31 a share:

  • Despite the challenges in the refining space, HollyFrontier more than sextupled operating cash flow from fiscal 2009 to fiscal 2011.
  • It is selling at around 5.5x expected fiscal 2012's EPS, a substantial discount to its five-year average based on forward earnings (10.4).
  • The stock has a solid balance sheet with almost $600 million in net cash on the books, pays a 1.3% dividend and is selling for less than 5x operating cash flow.
  • Consensus estimates for fiscal 2012 earnings have moved up substantially over the past month, and the median analysts' price target on HFC is $39 a share.


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