In Oil & Companies News 18/08/2016
It seems oil’s big recovery may never come. Last week, chatter from the IEA and Saudi Arabia helped oil rebound, but we’re still down 50% from 2014 prices. What’s more, continuing concerns about energy companies’ ability to pay out dividends has caused massive declines for many stocks in 2016, even after steep losses spanning two years. Some people are giving up on energy altogether.
But that would be a mistake.
Now that oil is low, we contrarians can see which companies can survive in a world of cheap energy and which companies are woefully unprepared. Surprisingly, a group of oil refineries are able to survive a world of sub-$40 oil, and now that crude has risen to over $43, these refineries are astoundingly underpriced.
Betting directly on oil itself is not only a headache, but also exposes investors to tremendous price fluctuations without an income stream. Finding the bottom is tough for anyone, as the negative balance sheets for oil producers demonstrates. But underpriced refineries provide secure high dividends with some additional price upside if energy rallies.
My top five? Valero Energy (VLO), Tesoro (TSO), Western Refining (WNR), Phillips 66 (PSX) and Marathon Petroleum Corporation (MPC).
Why these refineries in particular? Let me give you three good reasons.
#1: Cheap Valuations
2016 has not been kind to any energy stock, and these refineries are no exception. On average, these stocks are down 22% year-to-date:
Falling Prices Despite Oil’s Resilience
If oil prices kept going down, this decline would make sense—but as I’ve said, oil is actually recovering in 2016. That means these companies’ abilities to turn a profit should improve, meaning this price decline is an irrational turn of the market.
On top of that, the decline in prices has caused the forward P/E Ratio for these companies to plummet:
Earnings on Sale
With an average P/E ratio of 15.2, these stocks are currently 40% cheaper than the S&P 500. And since these companies remain profitable—unlike big and supposedly safe energy companies like Chevron Corporation (CVX)—it also means we are not buying companies that are losing money.
#2: Healthy Operating Margins
Despite crude’s price decline, refinery margins are actually on a long-term upswing:
Profitability is Improving
Last year was a period of margin improvement, and these firms have continued to be profitable even through the worst moments of 2014 when oil was falling fastest. As a result, EPS (while not growing by leaps and bounds) has at least remained positive over the last twelve months:
EPS Still High
And EPS still remains higher than dividends paid over the last twelve months for each company:
Dividend Coverage is Fine
Which means we can rest assured that our payouts from these companies are not threatened by cheap oil—and if energy continues to recover, our income may even grow.
#3: Strong and Resilient Dividend Stream
Buying these stocks at low levels gives us the potential for capital gains. And while we’re waiting for these stocks to move higher, we can get an average dividend yield of nearly 4%:
Big Dividends Just Got Bigger:
Worried about dividend cuts? Don’t be. These companies have all grown their dividends over the last five years:
Dividend Growth Continues for All
Of course, refineries are not true long-term buy and holds for a dividend growth portfolio. They are interesting speculations now, but I prefer stocks with less sensitive business models that grow their profits and dividends year after year, regardless of what happens in the U.S. or global economies.
I like seven in particular. Many of them pay 4% dividends or better today, with double-digit dividend growth likely in the years ahead.
Source: Forbes
