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Why This Refining Stock Could See Further Gains: Valero Energy Corporation (VLO), HollyFrontier Corp (HFC), Western Refining, Inc. (WNR)

With respect to this coming deluge of crude oil to the Gulf Coast, there is one point worth noting, however. Refiners in the region are generally better equipped to process heavier crudes, as opposed to the primarily light, sweet crudes that will soon be flowing to them.

Over the past few years, many have invested heavily in catalytic crackers, hydrocrackers, and coking units, which are designed to convert heavy crudes into lighter refined products. While these refineries do have the ability to process light crudes, doing so can lead to major imbalances.

For instance, it might underload cracking units designed to handle heavy crude components, while overloading units designed to process lighter components. This can lead to a poor utilization of their available capacity.

1 stock to consider
Whether Gulf Coast refiners as a whole will be able to handle the coming flood of light, sweet crude remains to be seen. But I think one company is particularly well poised to profit from the influx of cheaper light oil — Valero Energy Corporation (NYSE:VLO).

The world’s largest independent refiner, it boasts a total refining capacity of 2.8 million barrels a day, of which two-thirds is located in the Gulf Coast. At its refineries in Memphis, Tenn., and the Gulf Coast region, the transition toward using cheap domestic crude allowed the company to more than double its fourth-quarter refining margins from the year-earlier quarter.

In fact, the company recently announced that is has stopped buying light, sweet oil from abroad, after making significant progress in switching over to domestic crudes. Valero Energy Corporation (NYSE:VLO) has also drastically reduced its consumption of heavier crudes, with domestic light, sweet crude currently accounting for half of its feedstock, up from a third not too long ago.

Similarly, Phillips 66 (NYSE:PSX), the nation’s biggest independent refiner by revenue, also recently announced that its plants in the Gulf Coast region will no longer need to import light, sweet crude oil from overseas, reflecting a positive trend sweeping the Gulf Coast refining industry. Like Valero Energy Corporation (NYSE:VLO), Phillips also posted strong fourth-quarter earnings that were boosted by its increased access to cheap domestic oil.

In fact, Valero’s access to discounted crudes contributed to fourth-quarter earnings that were the highest in seven years, coming in at $1.01 billion, or $1.82 a share, as compared with $45 million, or $0.08 a share, in the year-earlier quarter.

Going forward, I suspect that Valero should continue to outperform as the LLS price falls, especially considering its relatively robust light oil processing capacity; three of its seven refineries along the Gulf Coast are equipped to process light oil. Though the stock has seen a meteoric rise over the past year, I think it may have even more room to run, thanks to these favorable developments.

The article Why This Refining Stock Could See Further Gains originally appeared on and is written by Arjun Sreekumar.

Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Kinder Morgan and owns shares of Kinder Morgan and Western Refining.

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

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