Energy Investing: Refining

This article is part of our Energy Investing series. Click back to the series introduction to learn more and access easy-to-follow links to the entire series.

The oil and gas industry presents plenty of ideas for investors in need. There are so many options that entire portfolios can be built to reflect the process of extracting commodities from the ground and turning them into an end product that people use every day. While I'm not suggesting you actually do that, I am suggesting taking a closer look at energy from start to finish and evaluating the best stocks for your current portfolio.

We've already tackled exploration and productionoil-field services, and midstream. Today, we move on to refining companies. Refining tends to make people cringe -- perhaps because it's so closely associated with gasoline, and gas prices are really bumming people out right now. But 2011 was a great year for refining superstar Valero (NYSE: VLO  ) , and the company looks to continue the trend this year. In fact, there are several refiners that may make a great addition to your portfolio.

State of the industry
As Fool columnist Morgan Housel pointed out earlier this year, the U.S. has quietly become a net exporter of petroleum goods. In six years the U.S. has gone from importing 840 million more barrels of petroleum products than it exported to being a net exporter by 27 million barrels. As we'll see later, this trend was a boon for the refining industry.

Another trend that is hard to miss is the number of refinery shutdowns, particularly on the East Coast of the U.S. and in Europe. Sunoco and ConocoPhillips (NYSE: COP  ) have both announced East Coast shutdowns, while Europe's refining industry has fallen victim to aging facilities, government taxation, and the high price of crude.

Margins on petroleum products in Europe have fallen from about $6 to $1.60 in the past two years. Over the course of last year, 15 different European refineries have closed, threatened to close, or operated on an abbreviated schedule. It is, in short, a mess over there.

Hot spots
Given the current state of the industry, refiners on the U.S. Gulf Coast and in the middle of the country are in the best shape.

The U.S. oil boom in the North Dakota and Texas shale plays has resulted in a glut of oil at Cushing, Okla. The refineries that are sitting right there, like HollyFrontier's (NYSE: HFC  ) , can take advantage of the cheap crude to boost their margins. The East Coast refineries get most of their oil from imports; this oil is more expensive, crushes margins, and plays a key role in the shutdown of facilities from Pennsylvania to the Virgin Islands.

The refineries on the Gulf Coast can also benefit from cheaper crudes, but the advantages don't stop there. These refineries tend to be more complex, enabling them to refine multiple grades of crude. Additionally, a Gulf Coast location is ideal for shipping exports.

In fact, refineries on the West Coast are enjoying that same advantage right now. The Energy Information Administration estimates that in 2007, before the recession struck, West Coast refineries exported about 4,000 barrels of gasoline per day. By December 2011, that number skyrocketed to 33,000 barrels per day.

Western Europe and Latin America are two of the particularly strong markets. For example, diesel exports to Latin America continue to lead all regions worldwide, but over two-thirds of diesel export growth came from the European market. Increasing demand from developing economies and the weak refining market in Europe have really lifted U.S. refining.

Players
Valero is the top dog in the industry right now, but let's take a closer look at how everyone else is doing.

Company

2011
Revenue (billions)

2010
Revenue (billions)

YOY
Growth

Stock Performance
YTD

Valero $126 $82 35% 36%
HollyFrontier $15 $8 47% 42%
Western Refining (NYSE: WNR  ) $9 $8 11% 42%
Tesoro (NYSE: TSO  ) $30 $21 30% 22%
Calumet Specialty Products

 
$3 $2 33% 23%

Source: Yahoo! Finance and YCharts.

Again, this chart emphasizes the success the industry experienced in 2011. Going forward, Valero and Tesoro stand to gain if the export market stays strong, while HollyFrontier and Western Refining continue to reap the benefits of U.S. domestic oil production.

Foolish takeaway
Chances are there is a refining company that's just right for your investing needs. Checking in with our CAPS community and using the Fool's My Watchlist service are both great ways to do more research to narrow down the choices for your portfolio.

Expensive oil isn't great for refiners, but it will benefit these three stocks that Fool analysts have pegged to profit from high oil prices.

Fool contributor Aimee Duffy doesn't own shares of the companies mentioned in this article. If you have the energy, check out what she's keeping an eye on by following her on Twitter, where she goes by @TMFDuffy.

The Motley Fool owns shares of Western Refining. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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