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The 3 Best Stocks at the Pump

By Reuben Gregg Brewer - Sep 14, 2015 at 1:05PM

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Gasoline is a refined oil product, and here are three of the best stocks in the gas space.

Gasoline is made from oil by refineries. Because it's tied to commodity markets, it goes through often volatile price swings. That said, there are some refiners that have proved their ability to weather good times and bad. Diversified energy giant ExxonMobil Corporation (XOM 0.98%), independent refiner Valero Energy Corporation (VLO 2.88%), and slightly more diversified refiner Phillips 66 (PSX 3.09%) are a trio of the best stocks at the pump.

Safety in size
Although you probably know Exxon is a big oil driller, you most frequently see its gas stations, which go under the names Exxon, Mobil, and Esso. It's this diversified model that males Exxon one of the best choices for conservative investors looking to invest in the gas space.

Esso is Exxon in foreign markets. Source: M.Minderhoud, via Wikimedia Commons.

For starters, it has three primary businesses -- oil and natural gas drilling, refining (gasoline and other products), and chemicals. All are huge. When one area is out of favor, the others are typcialy there to help offset the pain. That's particularly true with oil and refining. Since oil is a primary refining input, low oil prices boost refining's margins but crimp results in the oil business. Moreover, because of Exxon's scale, it has a global reach that only a few competitors can match.

But there's more to like here. For example, debt makes up only 10% or so of the capital structure. And its return on equity, essentially what it earns for investors, has recently been in the mid-teens, half of what it can earn in good periods. But even that depressed number is nearly three times the industry's average. In other words, it's diversified, financially strong, and well run. Just what a conservative investor would want from a company that operates in a volatile industry.

Focusing on refining
That said, if you're looking for a more specific pump focus, Valero is probably a better option. The company lays claim to being the world's largest independent refiner. What sets it apart is its scale in the refining space, with 15 facilities across the United States, Canada, and the United Kingdom. It provides fuel to some 7,000 gas stations in four countries.

And many of its facilities can process different grades of crude oil, which means it can switch to the cheapest feedstock options to support profit margins. Its U.S. refineries are also well located in key markets. Notably, many of its facilities are on the Gulf Coast, which has allowed Valero to tap a growing gasoline export market as well.

The company's Valero Energy Partners investment, a limited partnership in which Valero is the general partner and a large shareholder, is also a key asset. This relationship allows the refiner to raise growth capital by selling, or dropping down, its midstream assets to the LP. But because it's the GP, it still controls the assets and benefits financially from their operations. Having another avenue to support growth spending is a valuable tool for one of the world's largest independent refiners should times get tough, which is almost a certainty in the commodity markets in which Valero operates.

Gas isn't the only fuel refiners make. Source: Steve Morgan, via Wikimedia Commons.

Slightly more diversity
So you've got widely diversified Exxon and highly focused Valero. How about something in between? For that, you should look at Phillips 66. This company is a refiner, like Valero, but is also a 50% partner with Chevron in a global chemicals business.

It owns 11 refineries in the United States and three in Europe, producing gasoline and other products, such as jet fuel, that get distributed to around 10,000 retail locations. And it has two LP relationships to help fund its growth through drop-downs, while still retaining control of and receiving financial benefits from valuable assets. So in many ways it's similar to Valero. But it also has that chemicals business, which gives it more diversification to help soften the blow when refining is feeling the pain of volatile commodity prices. But it avoids the risks of the oil drilling business, which means it stops just shy of an Exxon.

This makes it a good option for investors who want to take on a little more exposure to the entire oil and gas product chain but still don't want to venture into the wildcatting game.

At the pump
If you're looking to find the best investments at the pump, you have plenty of options. However, if you think big is better, then Exxon is probably right for you. If you want a focused company with an industry leading position, Valero is the best bet. But if you're stuck in between, then take a look at Phillips 66, which gives you less energy-industry exposure then Exxon, but more than Valero. With plenty of differentiation between them, this trio of industry leader are some of the best options for investing at the pump.

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Stocks Mentioned

Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
$97.59 (0.98%) $0.95
Valero Energy Corporation Stock Quote
Valero Energy Corporation
$131.81 (2.88%) $3.69
Phillips 66 Stock Quote
Phillips 66
$101.73 (3.09%) $3.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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