Five Oil Refiner Investments to Buy as ‘Golden Age’ Starts Amid War

Paul Dykewicz

Five oil refiner investments to buy provide a gusher of opportunities as the sector embarks upon what BofA Global Securities calls a new “golden age,” despite Russia’s President Vladimir Putin’s invasion and continued devastation of Ukraine and its people.

The five oil refiner investments to buy feature three stocks and two broad commodity funds that offer a chance to benefit from multiple catalysts. U.S. oil refiners hold structural cost advantages compared to international peers and should benefit from an expected post-COVID recovery in demand and refinery closings that reduce supply and lift margins.

BofA Global Securities recently released a research report that declared a new regional ‘Golden Age’ for U.S. refining. The basis for that view is valuation aided by sustainable free cash flow (FCF) that measures the cash left after a company pays its operating expenses and capital expenditures.

Free cash flow yields are at their highest levels in a decade to help shift momentum toward oil refiners, BofA reported. Recent geopolitical events, such as Putin’s unrelenting attack of Ukraine, underscore the consequences of underinvestment in production, the investment firm wrote.

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Five Oil Refiner Investments to Buy Aided by Economic Sanctions 

The shelling of hospitals, schools, residential areas, churches, nuclear power plants, oil refineries and a theater used as a shelter became a precursor to brutal rapes, torture and outright executions of Ukrainian civilians that caused many countries to put economic sanctions on Russia. Among those sanctions is severing ties with Russia as a provider of oil or natural gas, or significantly slashing such trade.

Russia’s losses due directly to Putin’s policies are leading to potential gains for Western oil refiners that are trying to fill the void for European customers seeking to wean themselves away buying energy from Russia that Putin is using to fund his invasion of Ukraine. As the old adage goes, there always is a bull market somewhere and one of the latest is in the oil patch.

One of the biggest large-cap energy companies in the market is Exxon Mobil Corp. (NYSE: XOM), a recent addition to the recommendations in the Fast Money Alert trading service led by seasoned stock pickers Mark Skousen, PhD, and Jim Woods. The integrated oil and gas company explores for, produces and refines oil around the world.

Mark Skousen, a descendant of Benjamin Franklin, talks to Paul Dykewicz. Skousen leads the Forecasts & Strategies newsletter, along with the Five Star Trader, Home Run Trader, TNT Trader and Fast Money Alert services.

Exxon Mobil Leads the Five Oil Refiner Investments to Buy

Irving, Texas-based Exxon Mobil produced an average of 2.3 million barrels of liquids and 8.5 billion cubic feet of natural gas per day in 2021. At the end of 2021, its reserves totaled 18.5 billion barrels of oil equivalent, including 66% from liquids. The company is the world’s largest refiner with a total global refining capacity of 4.6 million barrels of oil per day to rank as one of the world’s largest manufacturers of commodity and specialty chemicals.

“Size does matter when you are talking about oil and gas companies,” Skousen and Woods wrote to their Fast Money Alert subscribers. “What also matters is that oil prices have soared due to a combination of robust demand dynamics and constricted supply caused in part by Russia waging war against Ukraine.”

Paul Dykewicz meets with Jim Woods, who leads the Successful Investing and Intelligence Report investment newsletters, as well as the Bullseye Stock Trader, High Velocity Options and Fast Money Alert trading services.

With no end for Putin’s war in sight, the “smart money” is betting on higher energy prices, and the even smarter money is buying XOM, Skousen and Woods wrote. The proof comes from a 7.17% rise in the last week, a 45.56% jump so far this year and a 55.88% surge in the past 12 months.

Chart courtesy of www.stockcharts.com

Another investment professional who recommends Exxon Mobil is Bryan Perry, head of the Cash Machine investment newsletter, as well as the Premium Income, Quick Income Trader, Hi-Tech Trader and Breakout Options Alert advisory services. Perry, who has a track record for profitably recommending dividend-paying oil and natural gas companies, also is known for finding high-income investments.

Bryan Perry heads the Cash Machine newsletter.

Exxon Mobil offers a current dividend yield of 4%. BofA has placed a $120 price target on the stock.

Money Manager Picks One of Five Oil Refiner Investments to Buy

A third investment professional who is recommending Exxon Mobil is Michelle Connell, a former portfolio manager who now serves as president of Dallas-based Portia Capital Management. Connell also told me she likes Valero Energy Corp. (NYSE: VLO), of San Antonio, Texas, offering a current dividend yield of 3.4%.

Valero is San Antonio’s largest publicly traded company and among the world’s largest independent petroleum refiners. It also claims to be North America’s largest producer of renewable fuels, as well as the world’s second-largest producer of sustainable diesel.

Michelle Connell, CEO, Portia Capital Management

Connell said her reasons for recommending Valero include:

  • Its status as the second-largest refiner in the United States.
  • U.S. refiners wield cost advantages compared to foreign competitors in the European Union and elsewhere.
  • The company’s natural gas for refining oil is the cheapest in the United States.
  • Analysts recently boosted VLO earnings estimates and price targets.
  • Its potential 12-month upside: 15-20%. BofA set a $140 price target.
  • A dividend yield of 3.4%.

“The fundamentals that drove strong results in the first quarter, particularly in March, continue to provide a positive backdrop for refining margins,” said Valero’s Chairman and Chief Executive Officer Joe Gorder, when the company reported its latest financial results.

Chart courtesy of www.stockcharts.com

BofA Recommends Two of the Five Oil Refiner Investments to Buy

BofA also recommends VLO but cautions downside risks to its price objective include the company’s heavy weighting toward “sour crude.” As light-heavy crude differentials narrow, the benefits of a more complex refinery may dim and delay return on investment, BofA continued.

Plus, the company is vulnerable to a dip in refining margin, BofA opined. If demand for refined products is weaker than expected, or if oil prices remain robust, margins could be pressured.

Other risks include potential increases in operating expenditures, capital expenditures and taxes. Another risk remains due to the uncertainty of whether tax reform will be passed.

Potential outperformance of the price target for VLO could come from higher-than-expected spreads and stronger-than-forecast gasoline demand, according to BofA.

PBF Energy Earns Spot Among Five Oil Refiner Investments to Buy

PBF Energy Inc., (NYSE: PBF), of Parsippany-Troy Hills, New Jersey, is one of the largest independent petroleum refiners and suppliers of unbranded transportation fuels, heating oil and petrochemicals. 

BofA gave PBF a $35 price objective, based on an assessed discounted cash flow (DCF) value that treats the assets as annuities after deducting maintenance capital. The investment firm used a long-term Gulf Coast 321 crack spread in its benchmark assumptions of $11.50/bbl., a long-term crude differential of $3.5, a weighted average cost of capital (WACC) of 9.3%, a zero terminal growth rate and a 22% corporate tax rate.

Potential for PBF to outperform PBF’s price objective could include crude spreads and crack spreads remaining above BofA’s expectations, higher-than-expected earnings and improved valuation. Downside risks to meeting BofA’s price objective could occur if margins and crude spreads compress faster than forecast, hurting earnings and share price.

Chart courtesy of www.stockcharts.com

Pension Fund Chief Picks Two of Five Oil Refiner Investments to Buy

Beware of overbought oil stocks due to the surge in their prices so far this year,” said Bob Carlson, chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets. Investors are worried that monetary tightening by the Federal Reserve and slower growth in China due to surging COVID-19 cases will reduce global growth and therefore weaken demand for energy.

“My top pick remains the ETF Energy Select Sector SPDR (XLE),” said Carlson, who also leads the Retirement Watch investment newsletter. “It tracks the S&P 500 energy sector, which is the top-performing sector in the S&P 500 in 2022 after years of underperforming the rest of the index.”

The ETF holds 21 stocks and three other types of investments. About 76% of the fund is in its 10 largest positions. Exxon Mobil (NYSE: XOM) was almost 23% of the fund, and Chevron (NYSE: CHX) was just over 21% of the fund. Other major holdings include EOG Resources (NYSE: EOG), Schlumberger NV (NYSE: SLB) and Conoco Phillips (NYSE: COP).

The diversified energy fund holds a portfolio of refiners, exploration and production (E&P) stocks, as well as companies engaged in two or more activities. XLE is up 61.60% in the last 12 months, 38.83% for the year to date, 12.50% in the past three months and 3.62% in last week. The gain in the past week shows the fund remains on the rise.

“As long as economic growth remains solid, demand will exceed supply and support high prices for energy products,” Carlson said.

Even though companies are working to increase production, it takes a “long time” to do so with new sources or to restore old ones that have been shut down, Carlson said.

Chart courtesy of www.stockcharts.com

MLOAX Joins Five Oil Retailer Investments to Buy 

A fairly aggressive fund is Cohen & Steers MLP & Energy Opportunity (MLOAX), Carlson said. It looks for companies in exploration, production, gathering, transportation, processing, storage, refining, distribution, or marketing of oil, natural gas and other energy sources.

The fund’s largest holding is Enbridge Inc. (NYSE: ENB), which has an extensive pipeline network that transports natural gas and other energy products. The fund’s second-largest holding is Cheniere Energy Inc. (NYSEAMERICAN: LNG), which exports liquefied natural gas (LNG). Other top holdings are the Williams Companies (NYSE: WMB), TC Energy (NYSE: TRP) and Energy Transfer LP (NYSE: ET).

The fund has 56 positions, with 55% of the fund in the 10 largest positions. MLOAX is up 33.64% in the past 12 months and 20.73% for the year to date. It also has climbed 11.75% for the past three months and 2.41% in the last week.

As an open-ended mutual fund with several share classes, investors should determine which share class has the lowest cost by inquiring with their brokers.

Chart courtesy of www.stockcharts.com

COVID-19 Infects More than Half the People in America

COVID-19 cases and hospitalizations have risen about 10% in the last week. The U.S. Centers for Disease Control and Prevention (CDC) also has reported more than half the people in America, including most children, have been infected with the coronavirus.

In China, lockdowns have affected at least 373 million people, including roughly 40% of the country’s gross domestic product (GDP). A key effect is continued disruption of the world’s supply chain for many products, including oil.

Most of Shanghai’s 25 million residents remain in lockdown, as the Chinese military and additional health workers have been sent there to aid in the response. Shanghai, home to the world’s largest port, has strained to unload cargo due to strict regulations that have caused shipping containers to stack up. Some frustrated Shanghai residents have taken videos that went viral to show people screaming from high-rise buildings about needing food, but the government is trying to crack down on the posting of such expressions of frustration.

Also in China, young children with COVID-19 have been separated forcibly from their parents, fueling public discord, as Chinese leaders seek to stop the spread of a new, contagious subvariant of Omicron, BA.2. The variant also is causing a new wave of infections in European nations that include Germany, the Netherlands and Switzerland.

U.S. COVID Booster Shots Top 1 Million and Deaths Near 1 Million 

COVID-19 deaths worldwide exceeded 6.24 million to total 6,240,888 on May 3, according to Johns Hopkins University. Cases across the globe have jumped to 514,913,818.

U.S. COVID-19 cases, as of May 3, hit 81,506,075, with deaths rising to 994,744. America has the dubious distinction as the nation with the most COVID-19 cases and deaths.

Also as of May 3, 257,823,699 people, or 77.7% of the U.S. population, have obtained at least one dose of a COVID-19 vaccine, the CDC reported. Fully vaccinated people total 219,849,502 or 66.2% of the U.S. population, according to the CDC. America also has topped a key milestone by giving a COVID-19 booster vaccine to 100.8 million people.

The five oil refiner investments to buy offer another niche of energy stocks and funds that show signs of further gains ahead. Investors willing to buy after the assets have risen significantly in value could be rewarded by additional gains ahead, even if the easy money has gone to others.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, Guru Focus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great as a gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others. Call 202-677-4457 for multiple-book pricing.

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