Phillips 66 (PSX), HollyFrontier Corp (HFC): Buy These Three Refiners for a Recovery in the Brent-WTI Spread

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I have written further about HollyFrontier Corp (NYSE:HFC) ‘s value investment potential here.

A high yield

Northern Tier Energy LP (NYSE:NTI)

only owns one refinery but also operates a retail division, with 166 convenience stores and 67 franchised convenience stores, primarily in Minnesota and Wisconsin, under the SuperAmerica brand name. Northern Tier Energy LP (NYSE:NTI) also hold 17% of the Minnesota Pipe Line Company, a 455,000 bpd crude-oil pipeline system bringing oil down from Western Canada and North Dakota.

Northern Tier Energy LP (NYSE:NTI)’s refinery is located within easy access of its part-owned Minnesota Pipe Line, and for this reason, the company is able to achieve wide profit margins on low-cost crude from Canada and North Dakota. For example, Northern Tier Energy LP (NYSE:NTI) has a gross profit margin of 18.6%, 2.2% above that of mammoth peer Phillips 66.

Additionally, the company generates a 17.5% return on assets, once again above the 9.8% ROA achieved by Philips and above the sector average of 15.5%. These impressive ratios translate into shareholder returns far above that of the company’s peers. The firm has a historic dividend yield of 19% and I believe this is set to continue as more cheap crude flows through the US.

The company is bolstered by its relatively defensive retail division, which should cushion any failure at the refinery.

Foolish summary

So overall, the rapidly contracting Brent-WTI spread has spooked some investors but this contraction is expected to reverse over the next few months as supply exceeds demand and WTI is pushed lower.

The three refiners above each present a different play on the recovering spread and an opportunity for every type of investor. Although, if I had to pick one, HollyFrontier Corp (NYSE:HFC) offers the best value for money.

Fool contributor Rupert Hargreaves owns shares of HollyFrontier and NORTHERN TIER ENERGY LLC. The Motley Fool has no position in any of the stocks mentioned. Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Buy These Three Refiners for a Recovery in the Brent-WTI Spread originally appeared on is written by Rupert Hargreaves.

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