I’ve been scouring the universe of dividend-paying stocks in search of depressed assets that are supported by strong fundamentals, but just happen to have sold off in sympathy with a down-and-out sector.
I’m speaking of the energy sector, where every rally attempt for the past year has been cut down amid fits and starts of the price swings in oil prices. WTI crude prices has swung in a range of $111.06 per barrel back in June 2014 to a $35.64 per barrel in January to make for a very erratic energy market.
Just in the past year, WTI traded above $73/bbl. and as low as the md-$35/bbl. level this past December. At its current price of $53/bbl., WTI seems have reached an equilibrium between big oil-producing OPEC and non-OPEC nations, along with global demand. But any semblance of balanced market conditions can be upended with a single headline following by huge gyrations in prices.
The task of trying to make consistent profits in the energy sector has been elusive to say the least. The best profits have been made by those with an intermediate time horizon and an understanding of seasonality (summer driving season and Thanksgiving-New Year’s travel season). The months in between can be very difficult to predict and to profit. As such, there is a lot of frustration trading and investing in most all of the sub-sectors of the broader energy market.
One of the most profitable spaces to consider for yield and total return is in the companies that refine crude oil into gasoline, diesel fuel, jet fuel, heating oil, chemicals, lubricants and solvents among other petroleum-based products. These are the big categories from which refiners generate the majority of their profits. They are special in that their profits are derived by what is known as the “crack spread” or the difference between the price of crude oil and the prices of the products they refine. The crack-spread contract allows refiners to simultaneously lock-in a specific price for crude oil to be bought. Refined products thereby can be sold to set a fixed refining margin.
When comparing the short list of publicly traded refining companies that are master limited partnerships (MLPs), there are two companies that stand out for their solid execution and attractive dividend yields. The first is Valero Energy (VLO), the second largest pure refiner in the industry behind Phillips 66 (PSX), with a market cap of about $35 billion. Valero owns 15 petroleum refineries with a combined refining capacity of 3.1 million barrels per day that are sold wholesale and through 7,400 retail outlets. It also owns 11 ethanol plants that produce roughly 1.45 billion gallons per year.
The other refiner that catches my attention is CVR Energy (CVI), a much smaller refiner with a market cap of roughly $3.9 billion, which owns refining and nitrogen fertilizer operations. The company operates two refiners close to Cushing, Oklahoma, with a combined capacity of about 206,000 barrels per day.
Both companies are C-corporations and pay qualified dividends and many investors prefer common shares over Master Limited Partnership units where a separate K-1 filing is required. Valero’s dividend yield is 4.37% and CVR Energy’s dividend yield is a lofty 7.83%. Billionaire Carl Icahn owns 82% of all CVR Energy shares, making it his largest holding, second only to his own company’s stock, Icahn Enterprises LP (IEP).
Shares of Valero Energy traded as high as $126.98 in the past 52 weeks and today are offered at $82 for a nice discount to new investors. Shares of CVR Energy traded as high as $47.67 in the past 52 weeks and currently sell for $38 — also a very attractive discount. Historically, buying refining stocks in the first quarter of the year, and well in front of the summer driving season, has proven to be a successful pattern for booking sweet gains when the Memorial Day holiday comes around.
I currently recommend purchase of CVR Energy (CVI) and two other refining stocks in my high-yield advisory Cash Machine. Click here to learn more about that income-oriented, high-yield service. CVR Energy is one energy stock that should have a banner 2019 in terms of profits and price appreciation. The energy patch is tough to calculate against the wild swings of oil prices, but in Cash Machine, we buy only those energy stocks where management has demonstrated a keen sense of execution. Cash Machine is the home of high-yield investing.
Orlando MoneyShow, Feb. 7-10, Omni Orlando Resort: I will be a featured speaker at this special conference for investors and I hope to see your there. Other speakers include my fellow investment writers Mark Skousen, Hilary Kramer and Mike Turner. Registration is complimentary. To register, click this link or call 1-800-970-4355. And be sure to use priority code 046910.