We all know that oil is the basic building block of gasoline. And that we can't drive our cars without the stuff. If the world's dependance on gas interests you, Valero Energy Corporation (NYSE:VLO), Marathon Petroleum Corporation (NYSE:MPC), and industry heavyweight ExxonMobil Corporation (NYSE:XOM) are all stocks to watch at the pump.
Its fingers are in everything
Gasoline is easily one of the most ubiquitous fuels in the world. Although there are all sorts of alternative fuel options, from electricity to natural gas, none is likely to displace gas' reach in the near future. That's why a company like ExxonMobil has such a solid business even though oil prices are often quite volatile -- noting the steep decline in the back half of 2014.
Exxon is an integrated oil company, meaning it does everything from drilling for oil to refining it and selling its byproducts (like gasoline). It's highly likely you have a gas station near you with one of the company's internationally known monickers: Exxon, Mobil, and Esso.
And while Exxon isn't exactly a pure play at the pump, that's exactly why it should be on your list of stocks to watch -- it provides broad diversification and stability and has survived and thrived through good and bad market environments. What does this mean? When oil prices fall and crimp drilling results, the refining business is likely to see profits increase as the price of its key input declines.
For example, in the first quarter of 2014, when oil prices were still high, Exxon earned around $2.10 a share. A year later, when oil prices had fallen around 50%, it earned $1.17 a share. A big drop to be sure, but still well in the black. And don't forget that the oil giant has increased its dividend annually for well over a decade, a fact that can help sooth investors' nerves during tough times.
Just the gas
If, however, you are looking for a more focused way to invest in gasoline, you might consider Valero or Marathon. Both of these companies are independent refiners, making gasoline and other fuels in addition to specialty chemicals. Valero owns 15 petroleum refineries with operations in the United States, Canada, the United Kingdom, and Ireland. Marathon has seven refineries in the United States. What this pair does not do is drill for oil.
Like Exxon, however, both Valero and Marathon have associated gas station brands. However, these smaller refiners tend to be big players on a regional level, lacking the broad reach of Exxon. That said, each is working to create a larger footprint. Marathon, for example, bought all of Hess' retail locations in early 2014, expanding its reach from nine states to 23. It is in the process of converting those stations to its own Speedway brand.
A wrinkle with these two refiners is that they control publicly traded limited partnerships. This isn't a bad thing, since selling assets to a controlled LP allows Valero and Marathon to retain control of their assets while still raising cash for growth investments. However, it does complicate the business structure a little bit. It's just something to keep in mind if you decide to do a deep dive here.
Another thing to like about Valero and Marathon is that they are positioned to capitalize on growing global demand for refined products. Valero, with operations in several foreign countries, is clearly well on its way internationally. But since the United States is a net exporter of refined oil products, Marathon is also likely to see this boost results in the future. This is a potential growth area to watch for this pair.
One key issue to keep in mind, though, is that Valero and Marathon aren't likely to provide the same kind of steady performance that Exxon is capable of over the long term. For example, Exxon was profitable each year between 2005 and 2014, while Valero lost money in two of those years. That said, when oil prices fall, both Valero and Marathon should see profits widen because of lower input costs.
Broad and focused
Exxon is clearly the big name in this group. Its diversified business model and long history of success make it an appropriate choice for most investors. However, for those seeking more of a pump focus, gasoline refiners like Valero and Marathon will fit the bill. Refiners, however, are likely to be more volatile than an integrated giant like Exxon. Which approach is right for you depends on your tolerance for risk, but either direction will work if you are looking for stocks to watch at the pump.