Crude prices have dropped sharply over the past year with many analysts believing that the commodity will fall further before mounting a real recovery. From about $105 per barrel last July to around $50 now – sinking in between to a 6-year low of under $44 recently – the plummeting value of oil represents a decline of more than 50% over eight months.
What’s more, in the absence of major production cuts from OPEC, the effects of booming shale supplies in North America and a stagnant European economy, we do not expect much upside in the commodity’s prices in the near term. Moreover, a stronger dollar has made the greenback-priced crude more expensive for investors holding foreign currency. The Iranian nuclear deal, which has the potential to release more oil in the already oversupplied market, has put the final nail in the coffin.
As such, we can see why investors are scared to dip their feet into energy stocks.
Not Everything Is Pessimistic: Try the Downstream Segment
In particular, while all crude-focused stocks stand to lose from falling commodity prices, companies in the exploration and production (or upstream) sector are the worst placed, as they will be able to extract less value for their products.
Nevertheless, investors need not fear or steer clear of energy stocks as there are still a handful of them that are showing strength during this shaky period. In particular, with oil prices cooling off, U.S. downstream (refining and marketing) stocks have been notching up healthy gains.
The reason is very simple.
The business of the downstream players is negatively correlated with crude prices. This is because the companies use oil as an input from which they derive refined petroleum products like gasoline – the prime transportation fuel in the U.S. Hence, lower the oil price, higher will be their profits.
3 Stocks Standing Out from the Crowd
For investors wanting to take advantage of the bullish oil refining landscape, we present three companies that may deserve attention. Each of them has a favorable Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy). These picks also have promising momentum metrics (Momentum Score = ’A’ or ‘B’).
The Momentum Style Score indicates when the timing is favorable to enter a stock to take advantage of the momentum with the highest probability of success. The momentum-effect is quite strong among Zacks Rank #1 and #2 stocks because as earnings estimate revisions rise, prices race to keep up and anticipate future estimate revisions, resulting in even bigger gains.
Marathon Petroleum Corporation (NYSE:MPC): Findlay, OH-based Marathon Petroleum Corporation (NYSE:MPC) (MPC - Analyst Report) is a leading independent refiner, transporter and marketer of petroleum products. It has a combined crude oil processing capacity of approximately 1.7 million barrels per day through its portfolio of seven refineries.
A major advantage for the company is its proprietary access to pipelines, which inhibits lower-cost competitors from supplying its key markets. In addition to trading around 9.3 times forward estimates (under the peer group average of 10.4), Marathon Petroleum sports a trailing 12-month return on equity (ROE) of 22.7% – against its peer group average of 16.7%.
Quarterly earnings projections for this Zacks Rank #1 company (combined with a strong Zacks Momentum Style Score of ‘A’) are also on an upswing with the Zacks Consensus Estimate for the first quarter climbing 13 cents (or 5%) to $2.84 over the past week.
Valero Energy Corp (NYSE:VLO): It is the largest independent refiner and marketer of petroleum products in the U.S. It is also a leading ethanol producer with 11 plants in the Midwest. This San Antonio, TX-based downstream operator’s higher margins and lower expenses helped it deliver positive surprises in each of the last 4 quarters with an average beat of 23.60%.
Over the past week, current quarter estimates have risen from $1.69 per share to $1.72 per share, helping Valero to earn a Zacks Rank #2, further underscoring the company’s solid position. Finally, the company combines the positive Zacks Rank with the highly desirable Zacks Momentum Style Score of ‘B.’
Western Refining Inc (NYSE:WNR): Western Refining is an independent refiner and marketer of refined petroleum products in the Southwestern and Mid-Atlantic regions of the U.S. The El Paso, TX-headquartered stock is also a Zacks Rank #2 that’s surprised earnings to the upside in 3 of the last four quarters.
Additionally, the company – carrying a Momentum Style Score of ‘B’ – has a price-to-book (P/B) ratio of 1.5 and a price-to-sales (P/S) ratio of just 0.3, suggesting that the stock is still undervalued. (A P/S ratio lower than 1.0 and a P/B ratio under 3.0 generally indicate value). For the current quarter, we have seen 4 estimates moving up in the past 60 days, compared with just a single downward revision. This trend has caused the Zacks Consensus Estimate to trend higher, going from 69 cents per share two months ago to its current level of $1.07.
Bottom Line
While shares of each of the above-mentioned names have delivered returns of around 30% over the past 3 months, with the expectation for consistent growth in earnings, Marathon Petroleum, Valero Energy and Western Refining look poised to keep the winning streak going.