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

Adjusted first-quarter earnings came roughly 8% below consensus thanks to a lower than expected crude output due to a heavy turnaround schedule, which increased operating costs and reduced margin. That said, short-term results should be disregarded when analyzing HollyFrontier Corp (NYSE:HFC). After all, the company’s refineries are the most profitable in the U.S. and it has been increasing earnings by 41% Year over Year (YoY).

The market has been focusing on short-term results (that came below expectations) and has lost track of the long-term picture. This is the reason to explain its relative under-performance. Having trailed its peer group, HollyFrontier Corp (NYSE:HFC)’s stock is up by only 6.5% YTD.

Trading at 2013 7.7x P/E, 6.2x P/CF, and paying a 2.50% dividend, HollyFrontier Corp (NYSE:HFC) is a good option for those looking for upside potential and a relevant cash dividend within the refinery space. As a long-term investor, you should focus on the fact that the company has the most profitable refineries in the country and, as a result, it will always be an  attractive M&A target for bigger corporations such as Valero.

Bottom line.

If I had to invest in the sector, I would go long Tesoro Corporation (NYSE:TSO). Valero Energy Corporation (NYSE:VLO) and HollyFrontier are also great alternatives, but I think Tesoro has the greater upside potential, even when it is relatively expensive. Considering Tesoro’s smaller market capitalization ($1 billion below HollyFrontier’s market capitalization) and its great management, I feel Tesoro might be a good M&A target for bigger companies. HollyFrontier Corp (NYSE:HFC) would be my second choice given its ultra-profitable refineries and its price. Valero Energy Corporation (NYSE:VLO) is a mature company which is the perfect alternative for those looking for much more stable cash flows.

The article Reviewing 3 Oil Refining & Marketing Companies originally appeared on Fool.com and is written by Federico Zaldua.

Federico Zaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.