Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Changing Industry Fundamentals Make These 2 Refiners Look Attractive

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

It's no secret that refiners had a slow 2013. After a profitable 2012 when the spread between the international Brent oil benchmark and the U.S. WTI oil benchmark -- a key metric for refining profitability -- widened to historic levels, the spread collapsed during 2013, squeezing profits. However, now refiners such as HollyFrontier (NYSE: HFC  ) , Valero Energy (NYSE: VLO  ) , and Philips 66 (NYSE: PSX  ) are primed to make comebacks as several key benchmark spreads widen again.

Widening spreads
Analysts at Barclays have forecast that the spread between Brent and Light Louisiana Sweet, or LLS -- a benchmark that is rapidly taking the place of WTI as a reflection of market economics on the Gulf Coast -- will widen over the next year or so. The spread between Brent and LLS has closed in recent months because bad weather affected supply chains. However, now that the weather has cleared, analysts expect the Brent-LLS spread to widen throughout the rest of the year, and the refinery industry should benefit .

To play this trend the best refiner would be Valero Energy, as seven of the company's 14 refineries are located along the Gulf Coast.

However, HollyFrontier also looks well-placed to profit during the next few months. While the Brent-LLS spread is widening, the Brent-WTI spread has also expanded in recent weeks, although the spread is still far from the highs seen at the beginning of this year. The Brent-WTI has widened to $8.50 during the past week, off the yearly low of $6.10 it hit at the beginning of March. What's more, HollyFrontier has easy access to oil from the Permian Basin, which can trade at a discount of up to $8 from the WTI benchmark. So, for some of HollyFrontier's operations the spread between brought-in oil and refined product could be as wide as $16.8.  

So, it would appear that both HollyFrontier and Valero are well-placed to profit throughout the rest of the year, but which company is the best investment? Well, HollyFrontier has outperformed its larger peers on several key metrics during the past five or so years.

Impressive metrics
For a quick way of seeing how much more efficient HollyFrontier has been at generating returns than its larger peers have been, we can use the return on invested capital, or ROIC, metric. As defined by Investopedia, ROIC is:

A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. The return on invested capital measure gives a sense of how well a company is using its money to generate returns.

Over the past five years, HollyFrontier achieved an average return on invested capital of 14.7%. In comparison, Phillips 66 only achieved an average ROIC of 9.9%. Valero, the country's second-largest refiner by market capitalization, has only been able to achieve an abysmal ROIC of 1% during the past five years.

Further, HollyFrontier has been able to draw a wider profit margin from every barrel of oil that the company has refined -- 22% higher to be exact. During the past five years, HollyFrontier's average net income per barrel has been $4.57, Phillips 66's has been $2.5, and Valero Energy has only been able to achieve a five-year average of $0.34.

How has this reflected on performance?
For investors, these impressive production and ROIC metrics are all well and good, but unless this feeds through into share price performance there is very little to get excited about. However, aside from HollyFrontier's lackluster stock performance, the company has been returning impressive amounts of cash to investors.

Since July 2011, HollyFrontier has returned around $1.9 billion in cash to investors, which is around 21% of the company's market capitalization. These cash returns have been achieved and supported while the company has kept its balance sheet clean -- its total debt-to-capital ratio was only .03 at the end of the third quarter of last year. Since the end of 2010, Valero has returned $2 billion to investors.

Bottom line
So overall, with both the WTI-Brent and LLS-Brent spreads widening it would appear that refiners are set for a profitable 2014. The best way to play this could be with HollyFrontier as the company is America's most efficient and profitable refiner. Still, if you're bullish on the Gulf Coast then Valero could be the refiner of choice.

Profit from America's energy resurgence
You already know record oil and natural production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 22, 2014, at 3:29 PM, davidscott1 wrote:

    HollyFrontier faced a lot of trouble in first three quarters of fiscal year 2013, and refinery production was cut 3% over the earlier-year period to 429,440 bpd

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2896495, ~/Articles/ArticleHandler.aspx, 9/2/2015 8:04:30 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Rupert Hargreaves

Rupert has been writing for the Motley Fool since December 2012. He primarily covers tobacco and resource companies with a passion for value-oriented investments. .

Today's Market

updated Moments ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 4:04 PM
HFC $46.75 Up +1.47 +3.25%
HollyFrontier Corp… CAPS Rating: ****
PSX $78.56 Up +0.97 +1.25%
Phillips 66 CAPS Rating: *****
VLO $59.01 Up +1.61 +2.80%
Valero Energy Corp CAPS Rating: ****