The Secret Energy Trade Investors Are Ignoring: Western Refining Inc (WNR), Valero Energy Corporation (VLO)

Western Refining

This is the smallest company on the list, with a market cap of just over $3 billion.

In addition to refining, Western also has wholesale and retail operations to provide some mix of revenuestreams. One of the company’s biggest weapons is its proprietary access to pipelines, enabling it to control the supply of West Texas Intermediate crude being shipped to its competitors. Western has also begun cutting costs to improve margins, closing old refineries and consolidating others. The company recently raised its dividend by 50%, to 12 cents a share, and now carries a dividend yield of 1.4%.

But in spite of all that good news, Western’s forward P/E ratio of 7 is a discount to its peer average of 9.

Valero Energy

Valero is one of the largest refiners in North America, with 14 refineries across the United States, Canada and the Caribbean capable of producing 2.8 million barrels per day. That has put Valero in the perfect position to cash in on the crack spread, with shares surging more than 64% in the past year.

To further streamline the company’s business, Valero recently announced its intent to spin off its retail unit, CST Brands. The spinoff is expected to close in the second quarter of 2013 and further unlock the core value of Valero’s powerful refining operations. With a forward P/E ratio of 8, Valero trades at a discount to its peer average of 9 and the S&P 500’s 14.

Risks to Consider: Better domestic infrastructure for the distribution and consumption of refined energy products would strengthen West Texas Intermediate crude prices and tighten the spread with Brent. A stronger domestic economy would also fuel more demand for West Texas Intermediate crude, also tightening the spread with Brent.

Action to Take –> The crack spread is enabling refiners to log record profits. That dynamic is in position to continue due to regional production factors. That means it’s still a great time to buy refiners. My two favorite stocks from the group are Western Refining because of its proprietary access to pipelines and Valero Energy because of its dominant market position.

This article was originally written by Michael Vodicka, and posted on StreetAuthority.