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Valero Energy Corporation (VLO), HollyFrontier Corp (HFC), Kirby Corporation (KEX): These Three Stocks Will Continue to Surge During the Shale Revolution

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Valero Energy Corporation (NYSE:VLO)Shale gas is a game changer. We are in the very early innings of this process and investors still have ample opportunity to position their portfolio to capitalize on the phenomenon. Stocks poised to benefit have already made strong moves, but substantial upside remains if one takes a patient, long-term approach. This is a secular story that will play out over the next decade. Thus certain stocks stand poised to reap outsized gains in the next decade, but they will still be at the whim of market psychology and prone to substantial volatility over short-term periods. Gains certainly won’t be realized in a steady pattern and most likely via large upside moves followed by sharp pullbacks. But at the end of the day, the equities listed below will likely make the list of ten-year outperformers.

Cheap gas is great for refiners

The benefit to refiners is not a new concept. The S&P 500 Refining & Marketing Index has exploded to a gain of more than 100% in the last year alone. This has scared some into thinking that the opportunity has passed, but it would be a mistake to be so short sighted. The vast supplies of natural gas will create sustained declines in refiners’ utility expenses, which is one of their biggest costs. This isn’t a short-term situation and will allow for consistently higher margins. Valero Energy Corporation (NYSE:VLO) is the nation’s largest independent refiner and their first quarter results highlight vastly improved margins. The company’s refining margins per barrel was $10.59 versus $7.71 a year earlier. This helped the company achieve operating income of $1.1 billion versus a loss a year ago.

Valero Energy Corporation (NYSE:VLO) is well positioned to capitalize on the shale gas revolution, but even better positioned are the mid-continent refiners of which HollyFrontier Corp (NYSE:HFC) is the largest with a market capitalization near $10 billion. These companies have access to trapped gas from large resources such as the Bakken shale. There is still a notable lack of infrastructure capable of moving this gas from the middle of the country to the coasts. As a result, crude feedstock costs in the Midwest (WTI) are discounted relative to the global benchmark (Brent). This difference drops straight to the bottom line. The WTI to Brent gap is currently about $8, but is well below the peak.

Infrastructure development will eliminate the enormous discounts that prevailed over the last year, but the overwhelming supply of gas is expected to lead to a stable and persistent discount of $5-$10 for several years according to many industry experts. Access to cheap mid-continent gas was evident in HollyFrontier Corp (NYSE:HFC)’s first quarter results where a refining margin of $22 was more than double Valero Energy Corporation (NYSE:VLO)’s. The company announced a special dividend of $0.50, which is likely to be recurring for several years, for holders of record on May 29. The stock has a trailing dividend yield of 7% when the special dividend is included. A recent period of consolidation offers a great entry point for first time investors.

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