This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Jensen: These Two Refiners Hold Value

It looks like it will be an ugly start to the week, as the market focuses back onto the intractable problems of Spain and Europe. If we do see a substantial selloff, I plan to add to my positions in the refinery sector. I first outlined my reasons for believing the refiners were deeply undervalued back in a late April column. Since then, all of those selections have easily outperformed the overall market.

I still believe there is plenty of value left in the refinery space. Refining equities still (A) sport cheap valuations, (B) are benefiting by solid crack spreads, (C) have strong free cash flow due to reduced capital spending needs, (D) have operating margins that are benefiting from low natural gas prices, and (E) have plenty of room to raise dividend payouts. Here are two refinery stocks I like at their current levels.

Valero Energy (VLO - Get Report) is as an independent petroleum refining and marketing company. The company owns 16 petroleum refineries that have a combined throughput capacity of approximately 3 million barrels per day.

Four reasons VLO is a solid pick at $25 a share:

  • The stock is selling near the bottom of its five-year valuation range based on P/B, P/E, P/CF and P/S.
  • VLO yields 2.3% and Evan Calio at Morgan Stanley believes it could double its dividend by the end of FY2013, due to its relatively low payout ratio and robust cash flow.
  • The stock sports a cheap forward PE below 6, which is a significant discount to its five-year average (10.8). It also sells for less than 4x operating cash flow.
  • VLO is starting to get some notice from the analyst community. Dahlman Rose initiated the stock as a Buy in late April, UBS upgraded the shares to a Buy from a Neutral in mid-June and S&P has its highest rating and Credit Suisse has an Outperform rating and a $37 price target on Valero.

Phillips 66 (PSX - Get Report) was recently spun off from ConocoPhillips (COP). It operates 15 refineries with a net crude oil capacity of 2.2 million barrels per day, approximately 10,000 branded marketing outlets in the U.S. and Europe, and 15,000 miles of pipeline systems. Phillips also has a 50% equity investment in DCP Midstream, LLC, which operates as a natural gas gatherer and processor.

Four reasons PSX provides good value at $35 a share:

  • The stock is cheap, trading at just over 7x forward earnings and 89% of book value.
  • The company just paid its first dividend since becoming an independent company in July. The stock yields 2.3% and I would look for management to consistently increase the dividend payout in the years ahead.
  • Consensus earnings estimates have increased approximately 4% for both fiscal-year 2012 and fiscal-year 2013 over the past two months.
  • Analysts are starting to follow Phillips after the spinoff. Oppenheimer initiated coverage on the shares with an Outperform rating and Argus initiated PSX as a Buy in July. S&P and Credit Suisse also have positive ratings on the stock.

At the time of publication, Jensen was long COP, HFC, PSX and VLO.

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV


DOW 17,678.23 -40.31 -0.23%
S&P 500 2,056.15 -4.90 -0.24%
NASDAQ 4,863.3620 -13.1570 -0.27%

Our Tweets

Partners Compare Online Brokers

Top Rated Stocks Top Rated Funds Top Rated ETFs