Valero Energy Corporation (VLO), Phillips 66 (PSX): Why The Market Is Wrong About Oil — And How You Can Profit

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The duck-billed platypus defies all scientific reason.

This beaver-tailed, otter-footed, semi-aquatic creature is the only mammal on the planet that lays eggs instead of giving live birth. On top of that, it is the ONLY living representative of its family and species. Basically, the platypus is an inexplicable freak of nature. Although the platypus officially has no relatives, I have a theory that it may be distantly related to financial and commodity markets — which often also look really weird and defy explanation.

Recently, I’ve noticed an odd disconnect between the price of oil and the performance of oil- and energy-related stocks. I’m no Dennis Gartman or Jim Rogers, so reading commodity price tea leaves is not my thing. But there’s something going on — and if there’s something quirky going on in the investment world, there’s an opportunity to make money.

Here’s an interesting chart of the one-year price action on West Texas Intermediate crude (WTI):

The spot price of this Texas tea is up 13% over a one-year period. Why? Good question. Typically, oil prices (and the prices of other commodities) rise when the U.S. dollar is weak. However, that’s not the case.

Although the greenback appeared a little weak at the end of last year, the dollar has spent nearly a year where the value currently sits with enough volatility in between to make some extremely coordinated traders some money. But for folks like us, there’s not much change.

As a whole, commodity prices are in a steady downtrend (I briefly examined the end of the commodity supercycle earlier this summer) — except for oil. What gives? Like the duck-billed platypus, it defies explanation.

The New Oil Boom

Analysts and investment writers continue to chatter about the new U.S. oil boom. Thanks to fracking technology and recent discoveries, American energy security appears within grasp. The U.S. has become one of the world’s largest exporters (yes, exporters) of refined petroleum products.

However, a glut of global supply is inevitable. Economics 101 tells us that higher supply eventually results in lower prices, and the global oil supply is heading that way very quickly. Conventional logic would tell us prices should be lower or trending lower. They don’t seem to be.

Anecdotally, investors usually lift the prices of oil-related stocks as oil prices climb. This is happening, but only selectively. Some of these names are commanding unjustified premiums. However, there are a handful of oil-related stocks that have been mispriced or overlooked and offer extremely attractive value and profit potential (and some that aren’t as promising).

Oil Patch Bargain Bin

Valero Energy Corporation (NYSE:VLO): The world’s largest independent petroleum refiner and marketer trades at a nearly 50% discount to the price-to-earnings (P/E) ratio of the S&P 500 index. This $19 billion market cap player is benefiting from increasing domestic oil production, lower input cost and growth in U.S. refined product exporting. Shares trade at around $37 with a forward P/E of 9 and a dividend yield of 2.5%.

Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR): Petrobras is Brazil’s (the B in “BRICs”) national oil company. Although emerging markets have cooled recently, Brazil still remains an attractive opportunity thanks to its young and growing middle class. The downside is a weak currency and small pockets of social unrest. That aside, Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) has leveraged its large domestic reserves and exploration success to position the company as the dominant energy producer in Latin America. The stock looks cheap at around $14, a 43% discount from its 52-week high, with a forward P/E of 7.3 and a 2.6% dividend yield.

Phillips 66 (NYSE:PSX): Spun off from oil giant ConocoPhillips (NYSE:COP) last year, Phillips 66 (NYSE:PSX) was the refining and marketing arm of its former parent. Again, with the upswing in U.S. oil output, refining is the place to be. The company also holds significant assets in the natural gas liquids (NGL) space which, despite low natural gas prices, will be a growth are going forward. With a market cap of $36 billion, this big company looks downright cheap at around $59 a share with a forward P/E of 8.3 and a 2.1% dividend yield.

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