High oil and gas prices are boosting the energy sector as these stocks have widely outperformed the S&P 500 Index. It’s no wonder: Demand for refined products remains strong and global supply is tight.
Let’s pipe into three oil refiners with dividend yields above the market average.
Go Big, Go Valero Energy
Valero (VLO) is the largest petroleum refiner in the U.S. It owns 15 refineries in the U.S., Canada and the U.K. and has a total capacity of about 3.2 million barrels/day. It also produces renewable diesel and has a midstream segment, Valero Energy Partners LP, but its contribution to total earnings is under 10%. Valero should be viewed as a nearly pure refiner.
U.S. refiners faced a severe downturn in 2020-2021 due to the pandemic, which caused a collapse in oil consumption. Refining margins plunged and hence all the U.S. refiners incurred hefty losses in 2020. However, thanks to the vaccine rollout, the pandemic has subsided and global oil demand has recovered.
In late July, Valero reported its financial results for the second quarter of fiscal 2022, showing a strong recovery in the demand for oil products as Valero enhanced its refinery throughput from 2.9 million barrels per day in the first quarter to 3.0 million barrels per day. The global market of refined products has become exceptionally tight due to the sanctions of Western countries on Russia for its invasion in Ukraine. Valero has enjoyed record refining margins in the quarter and posted blowout (record) earnings-per-share of $11.36, thus exceeding analysts’ consensus by an impressive $2.16. It is remarkable that $2.16 per share would normally be great profits in a single quarter.
Moreover, refining margins have remained at record levels thanks to strong demand for oil products, the permanent shutdown of some refineries around the globe in the last two years due to the pandemic and tight supply due to the Ukrainian crisis. The stock has a 3.2% current dividend yield.
Take Trip to Phillips 66
Phillips 66 (PSX) was spun off from ConocoPhillips (COP) in 2012. Phillips 66 has a market capitalization of $43.0 billion and operates in four segments: refining, midstream, chemicals, and marketing. It is a diversified company with each of its segments behaving differently under various oil prices, in the absence of a severe recession.
Phillips 66 reported in late July financial results for the second quarter of fiscal 2022, showing record refining margins, which resulted primarily from the sanctions of western countries on Russia for its invasion in Ukraine. Realized refining margins skyrocketed sequentially from $21.9 per barrel to $46.7 per barrel and thus the operating income of the refining segment grew from $140 million to $3.1 billion.
As a result, adjusted EPS jumped from $1.32 to an all-time high of $6.77, and exceeded the analysts’ consensus by an impressive $1.01. Management raised the dividend by 5%. Even better, refining margins have remained around record levels in the third quarter.
Growth projects in the oil industry take many years to start bearing fruit, meaning there is a great lag between capital expenses and their resultant cash flows. Fortunately for Phillips 66, the company is currently in the positive phase of its cycle. While it has reduced its capital expenses in recent years, it has begun to reap the benefits from past investments.
In addition, the record earnings of the midstream, chemicals and marketing segments in 2021 are additional testaments to the widely recognized discipline of management to invest only in high-return projects. The pandemic greatly affected the results of Phillips 66 in 2020 but the company has fully recovered from that crisis. Moreover, Phillips 66 has many ongoing growth projects in its midstream segment. Furthermore, it is thriving right now thanks to the blowout refining margins.
PSX stock has a current yield of 4.3%.
Built to Last: HF Sinclair
HF Sinclair (DINO) was initially formed by the merger of two independent U.S. refiners, Holly Corporation and Frontier Oil, in 2011. It has a market cap of $11.0 billion and operates in three segments: refining, lubricants, and Holly Energy Partners, which is a midstream entity. Nevertheless, HollyFrontier should be viewed primarily as a refiner.
HF Sinclair last year completed the acquisition of the Puget Sound Refinery from Shell for $350 million. Sinclair has two refineries based at Rocky Mountain, a renewable diesel business and a branded marketing business. The deal is expected to enhance free cash flow by 20% in the first year while it has caused a 27% increase in the share count.
Like its industry peers, HF Sinclair is benefiting from wide refining spreads. HF Sinclair reported financial results in August for the second quarter, showing the refining margin of HF Sinclair more than tripled over the prior year’s quarter, from $11.7 to $36.4 per barrel, and refinery throughput increased 51%, mostly thanks to the acquisition of the Puget Sound Refinery, which could not have a better timing. As a result, the adjusted EPS of HF Sinclair jumped from $0.87 to an all-time high of $5.59, beating the analysts’ consensus by $1.04.
Sanctions of western countries on Russia, meanwhile, have greatly tightened the markets of oil and refined products, which have pushed refining margins to skyrocketed to unprecedented levels.
Thanks to the proximity of its refineries to the domestic oil production, HF Sinclair buys its crude oil at a discount to WTI prices. Moreover, HF Sinclair is likely to benefit from the synergies it will achieve from its recent acquisitions of the Puget Sound Refinery and Sinclair Oil. HF Sinclair has also resumed share repurchases. Moreover, HF Sinclair has the strongest balance sheet in its peer group and hence it can endure downturns.
HF Sinclair has an expected dividend payout ratio of 13%, which means the dividend is secure. Shares currently yield 3%.