The energy sector has taken a beating this year, and despite continued cuts in production from the OPEC nations and ongoing geopolitical issues in the Middle East, especially surrounding the straits of Hormuz and the safe passage for oil tankers, the per-barrel price for the black gold has fallen back to the low $50s. With sector underperformance to the S&P 500 at historic highs, it may be time to start adding some positions.
One way to play the energy sector is to buy the refiners, and with the price of oil, and in turn gasoline, actually falling, consumer use may jump. With a month left in the summer driving season before Labor Day, there may be some room for a sector rally.
The refiners provide a somewhat safer way for investors to be involved, and in a new research report, RBC remains positive on three top companies, all of which it rates Outperform.
The analysts feel comfortable about this smaller cap company. HollyFrontier Corp. (NYSE: HFC) is an independent refiner that produces various refined products. The company’s operations are organized into two reportable segments: Refining and Holly Energy Partners.
The company owns and operates five refineries in Artesia, New Mexico; Woods Cross, Utah; Tulsa, Oklahoma; Cheyenne, Wyoming; and El Dorado, Kansas. In addition, HollyFrontier owns and operates Holly Asphalt, which manufactures and markets asphalt products, and owns a 32% limited partner interest and 2% general partner interest in Holly Energy Partners.
HollyFrontier shareholders receive a 2.59% dividend. The RBC price objective for the shares is $64, and the Wall Street consensus target price is $55.69. The stock closed trading on Thursday at $51.04 a share.
This is the largest refiner in the United States and a much more conservative way to play energy. Marathon Petroleum Corp. (NYSE: MPC), one of the largest independent petroleum refining and marketing companies in the United States, is based in Findlay, Ohio. It owns seven refineries in the United States with total throughput capacity of around 1.7 million barrels per day.
The company operates approximately 2,750 retail sites under the Marathon and Speedway brands. In addition, it operates a logistics network of pipelines, barges, trucks and terminals that store and transport crude and products.
The company bought rival refining giant Andeavor last year for $23.3 billion in the biggest-ever deal for an oil refiner, creating the largest independent fuel maker in the United States. It was one of the biggest mergers in 2018.
Following the deal, Marathon became the largest operator of refining capacity in the United States, and management believes the company can achieve the $1 billion in synergies that it suggests. In addition, many on Wall Street give the company no credit for the possible International Maritime Organization change, which implies additional potential upside.
Shareholders receive a robust 4.28% dividend. RBC has a $66 price target, but the consensus target is up at $78.57. The shares closed at $49.52 on Thursday.
This Wall Street and RBC favorite is another solid play for conservative balanced accounts. Valero Energy Corp. (NYSE: VLO) is the largest independent petroleum refining and marketing company in the United States. It is based out of San Antonio, Texas; owns 13 refineries in the United States, Canada and Europe; and has total throughput capacity of around 2.5 million barrels per day.
Valero also is a joint venture partner in Diamond Green Diesel, which operates a renewable diesel plant in Norco, Louisiana. Diamond Green Diesel is North America’s largest biomass-based diesel plant.
Valero sells its products in the wholesale rack or bulk markets in the United States, Canada, the United Kingdom, Ireland and Latin America. Approximately 7,400 outlets carry Valero’s brand names.
Investors receive an outstanding 4.57% dividend. The $98 RBC price target is lower than the $101.75 consensus target. The shares ended Thursday at $78.76m up almost 4% on the day.
These three top refining stocks are way down from 52-week highs, pay solid dependable dividends and offer investors a way to play the energy sell-off with a much lower risk profile. For balance accounts looking for growth and income, these are outstanding stocks to add.