Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Tesoro Corporation (TSO), Valero Energy Corporation (VLO), HollyFrontier Corp (HFC): Reviewing Three Oil Refining & Marketing Companies

Page 1 of 2

It's Time to Sell These 4 Surging StocksThe refining and marketing sector has been outperforming the rest of the energy sector since 2012. Stocks in this sub-sector are up strongly this year, indicating that they are witnessing solid momentum. The U.S. shale energy revolution is making, once more, refining increasingly attractive. Let’s take a look at three companies and decide which one should you include in your portfolio.

The deal is closed

Tesoro Corporation (NYSE:TSO), the independent refiner of petroleum products, is going from good to great. The company recently announced that it has completed the acquisition of BP’s Carson refinery and all its related assets. The refinery is a 266 million barrels a day (mbd) complex located next to Tesoro’s 97 mbd Wilmington refinery, south of Los Angeles.

The transaction also includes related logistics assets, nearly 800 dealer-operated retail sites, as well as a 51% ownership in a 400 mega-watt gas fired generation plant. This generation plant sells about 25% of its power to the Carson refinery and the rest to the local utility grid. The grid will be extended to the Wilmington refinery for additional cost savings. Besides, the deal includes a 350,000-metric ton/year anode coke calcining operation.

The acquisition is expected to add up to $500 million to Tesoro Corporation (NYSE:TSO)’s annual EBITDA and up to $245 million to the company’s net income (before synergies). The purchase price is $1.08 billion, plus the market value of inventory, currently around $1.3 billion. This deal will expand its refining capacity by 50%, making Tesoro a great buy even at  today’s valuation.

The company’s shares are trading at 10.1x P/E and 5.9x P/CF based on an after-deal 2014 consensus. This compares to its peers average of 8.9x and 6.3x, but Tesoro Corporation (NYSE:TSO)’s management and current market position justify the premium. Even if Tesoro’s dividend yield of 1.23% is the lowest among its peer group, the company is my favorite pick among this group of three.

Share buy-backs should boost this stock

Valero Energy Corporation (NYSE:VLO), with a market capitalization of $22.8 billion, is a much bigger and mature company than Tesoro Corporation (NYSE:TSO) (which has a market capitalization of $8.6 billion). Indeed, it is the largest refiner in North America. This means that the company is more focused on delivering cash to its shareholders than on growing its top line.

As a matter of fact, Valero Energy Corporation (NYSE:VLO) is expected to generate free cash flow, after CAPEX and dividends, of $1.6 billion this year and roughly $2 billion in 2014. The company’s management is committed to use this cash to retire debt at maturity, grow dividends, and (above all) buy back shares. The company is expected to generate an EBITDA of $6.46 billion in 2013 and $6.36 billion in 2014.

Trading at  2013 8.3x P/E, 4.8x P/CF, and paying a 2% dividend, Valero Energy Corporation (NYSE:VLO) is a great alternative within the space for those looking for a much more stable company. You will not get the kind of upside potential you may achieve through Tesoro, but you will also own a much more stable asset which will keep on increasing its cash dividend yield at a steady rate.

First-quarter earnings disappoint but still impressive

HollyFrontier Corp (NYSE:HFC), the independent petroleum refiner and wholesale marketer of refined petroleum products, which was formed by the merger of Holly Corp and Frontier Oil, disappointed some investors with its first-quarter results.

Page 1 of 2
Loading Comments...