Load Up On These 4 Stocks Profiting From The Cheap Gas Revolution

There’s one small sub-sector of the energy complex that sees profits swing up as oil prices move down. It’s no surprise that 2015 has been a great year for these four companies and next year looks to be just as profitable. With winter being the best time to buy shares of these stocks, it’s time to load up.

Hidden in the weeds of the energy sector bear market, the result of the 50% decline in crude oil prices, is one segment of energy services that becomes generally more profitable as the price of crude declines. Crude oil refiners typically see greater refining margins at lower energy prices. Americans love lower gasoline and diesel fuel prices. As the price at the pump drops we drive more miles and many people motor down to their local dealerships to buy less gas efficient SUVs and large pickup trucks. As a result, refining companies benefit from both greater profit margins and increased demand for their products.

Before we get to a list of top refining company stocks you need to know some facts about this unique class of energy companies.

First, the gross margins earned by a refinery are dependent on the market driven prices for crude oil and fuels and other refined products. As a result, profit margins can swing significantly from quarter to quarter and year to year as the result of changing energy commodity prices. Refiners work to control their own destinies by upgrading their refineries to be more efficient, increase throughput capacities, and to handle more grades of crude oil to produce the highest value refined products.

Second, for a variety of reasons, refineries not located on the U.S. East or Gulf Coasts tend to be more profitable than those two locations where most of the U.S. based refineries are located. The coastal refiners primarily use more expensive imported oil, while inland refineries use lower cost crudes (with lower transport costs) produced in the energy plays from Texas through the Rocky Mountains to North Dakota. Fuel prices are based on the higher production costs from using imported oil. California based refineries also tend to be very profitable, due to the closed energy ecosystem on the West Coast.

Third, the market does not really understand that refiners like to buy cheap crude and use lower input prices to increase profit levels. You will find the pure play refining stock prices dropping along with every other stock in the sector on those days when the crude oil spot prices make a significant down move.

Fourth, the refining business is seasonal, with larger profit margins and more fuels sold in the Spring through Summer months and a slowing of both sales volumes and margins in the winter. This fact along with number three typically result in share price pull backs in the last quarter of the year. As an investor, you want to accumulate shares between now and the end of the year, spreading your purchases out over several buy trades. It’s hard to pick an absolute bottom, but you can average down as the market forgets that America consumes tens of millions of gallons of fuel every day and that American refining companies are the most efficient in the world.

Here are four refining focused energy companies that can be bought cheap in the winter months to produce well above average capital gains over the next year.

Valero Energy Corporation (NYSE:VLO) is a large-cap ($31 billion market value) company that owns and operates 14 refineries located across the continental U.S. The company also owns 11 ethanol plants. Fuels are distributed through over 7,000 Valero branded and also unbranded outlets. The VLO share price has appreciated by 200% over the last three years. During the same time frame the dividend has been increased six times and is now 266% of the dividend rate paid at the start of 2012.

Tesoro Corporation (NYSE:TSO) is about one-third ($12 billion market cap) the size of VLO, and all six of the Tesoro refineries are located in the western half of the U.S. The TSO share price is up nearly 300% in the last three years. Tesoro started paying a dividend in the third quarter of 2012 and the payout is now triple that initial dividend rate. The dividend was just recently bumped up by 17%.

HollyFrontier Corp (NYSE:HFC) is a $9 billion company that operates five refineries in the West and Southwest U.S. The HFC share price is up 70% in the last three years. This company has paid a lot of cash to investors with regular growing dividend payments and 14 special dividends of $0.50 each since Holly and Frontier merged in 2011. The company recently unveiled an efficiency and optimization plan that is expected to double annual EBITDA over the next three years.

$4 billion Western Refining, Inc. (NYSE:WNR) owns two refineries located in El Paso and the Four Corners area plus is majority owner of the highly profitable refining MLP,Northern Tier Energy (NYSE:NTI). This refiner has also produced 250% share price gains and a rapidly growing dividend, just increased again last week by 12%, over the last three years. With its smaller size, WNR has a more volatile share price, which allows investors to buy on dips for either nice short-term gains or a long-term lower average share cost.

If you use your head, and wait for the share price dips, you can make a lot of money with these refining companies. The companies listed above have tremendous and economically necessary business operations. You just need to let the market work for you.

These stock fit into my bigger strategy of finding companies that regularly increase their dividends to produce superior results, no matter if the market moves up or down in the shorter term. The combination of a high yield and consistent dividend growth in stocks is what has given me the most consistent gains out of any strategy that I have tried.