EC Which Is The Most Attractive Oil Refiner?

A) Introduction

While crude collapsing from $105 to $50 has hammered oil producers, energy refiners have been having their moment in the sun. Oil refiners tend to benefit when crude oil falls in price, as it is their main input cost. Whereas gasoline prices at the pump tend to be "sticky", in that they react to changes in international oil prices relatively slowly. Thus, oil refiners are able buy crude at cheap prices while selling gasoline at relative higher prices. This leads to an increase in margins, and corresponding increase in profits. In this article, we're going to be analyzing three different US crude refiners to see which one comes out on top. They are Valero Energy (NYSE:VLO), Marathon Petroleum (NYSE:MPC), and Tesoro Corporation (NYSE:TSO). We will be looking at their valuations, growth profile, how the "smart money" on the street is playing each stock, and concluding with some qualitative analysis and conclusions.

B) Value Breakdown

We take a quantitative approach to investing, preferring to focus our analysis on a certain set of metrics that have a strong predictive ability. We'll start by analyzing each of the crude refiners value profile. This is important to look at as "Value stocks (with low ratios of price to book value) have higher average returns than growth stocks (high price-to-book ratios)". These valuation profiles are shown below:

Table 1.1 - VLO Value Breakdown


Table 1.2 - TSO Valuation Breakdown


Table 1.3 - MPC Valuation Breakdown


Each of the three refiners is wildly undervalued on a revenue basis, with each of them boasting a minimum sales yield of 400%. This means investors can get $4 of revenue for every $1 they invest. This is way higher than the Oil, Gas, & Consumable fuels average of 38%, and overall energy sector average of 21%. This relative undervaluation holds true on an earnings, book value, and free cash flow basis, with each of the three refiners having an earnings yield of +6.5%, price/book of less than 2.3, and price/FCF of less than 21. Each of these minimums are more attractive than the industry group, sector, and overall market averages. Valero Energy looks especially undervalued, registering a very low price/book of 1.3 and price/free cash flow of 7.95 to go with an extremely high sales yield of 526% and earnings yield of 13.6%. There is no doubt that the market has punished these stocks over the last few months, and their valuations reflect that. Overall, we rate each of these stocks as 'Strongly Undervalued', with Valero Energy expected to outperform the market the market the most (12.4%) due to the undervaluation.

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Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in VLO, MPC, & TSO over the next 72 hours. The author wrote this article themselves, and it ...

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