Friday, November 6, 2015
Would you believe it if I told you there's a company in the oil sector whose sales are down more than 34% over this time last year... and whose profits are UP by 25% in that span?
It sounds unlikely, I know. But it's just one of several like it.
And right now, these companies are offering investors plenty of upside.
The company I'm talking about is Valero Energy. It's an oil refiner. Oil refiners take crude oil and turn it into products like gasoline, diesel, and fuel oil.
If these companies can sell those products for a lot more than the price of oil, they make a lot of money.
That's exactly what we're seeing today...
As regular readers know, the U.S. is producing a massive amount of oil. Annual U.S. crude-oil production is up more than 70% since 2008. The U.S. is producing so much oil that it's outpacing supply... which has caused crude-oil prices to plummet.
The price of benchmark West Texas Intermediate (WTI) crude oil is down around 55% from its June 2014 high.
Now, the drop in oil prices has had an effect on gas, diesel, and fuel-oil prices. Oil refiners' revenues (or sales) were down this past quarter from the same quarter last year, as the prices of these products have fallen. You can see these declining sales in the table below of Valero Energy and some of its competitors.
But crude oil's fall has pushed oil refiners' costs down even more. This has allowed them to increase their operating margins and generate bigger profits (EBITDA, or earnings before interest, taxes, depreciation, and amortization) than last year. Take a look:
Refiners' share prices are also benefiting...
Since I first told you about these companies in June, shares of Valero Energy, Phillips 66, and Tesoro are up an average of around 25% (excluding dividends). They're up an average of around 45% in the past year.
But there's likely more upside ahead...
For starters, oil prices will likely remain low for a while. The U.S. Energy Information Administration recently reported that U.S. oil production is back on the rise after falling from June to September. This will keep oil prices low.
CEO Paal Kibsgaard of oil-services giant Schlumberger (SLB) recently told analysts that oil prices may not begin rising until 2017. This will be great for oil refiners, as their costs remain low.
U.S. oil refiners are also getting a big boost from fuel exports.
Places like the U.S. and Australia are closing down oil refineries. In Latin American countries, attempts to build new refineries have gone unfinanced. That means these countries have to rely on reasonably priced imports from the U.S.
As a result, fuel imports from the U.S. are up in places like the U.K., Australia, and Latin America. U.S. exports of finished petroleum products have tripled over the past decade. And they're up more than 20% since 2013. Continued growth in fuel exports will only help these companies' bottom lines.
Finally, oil refiners are still decently priced. Their enterprise value (EV)-to-EBITDA ratios are lower than their historical averages. This ratio is a common valuation metric used by Wall Street. It measures how expensive a stock is. The lower the ratio, the cheaper a stock is.
We're no longer in the first inning of the uptick in the prices of oil refiners. But as long as crude-oil prices remain low, refiners will continue to pump out profits. They're also getting a big boost from fuel exports. And they're not overvalued yet. So there's still plenty of upside left.
If you haven't already, I recommend looking into some of the above companies today.
While oil refiners are a good way to invest in the oil sector right now, Matt Badiali says there's one oil stock you need to stay away from. "If you haven't already sold your shares, do it now... before things get even worse," he writes. Get all the details here.
"There's little agreement these days as to where oil prices are headed," Matt writes. "But there are two important factors that will have a big impact on oil prices in the near term..." Learn more here.
Shares of Bank of America rise 10% over the past month.
Pipeline giant Kinder Morgan falls to a new 52-week low.
Internet stocks continue their big uptrend... Amazon, eBay, Google, and Facebook touch fresh 52-week highs.
Chocolate maker Hershey sinks 8% over the past month.