Bread and Oil: California's Central Valley

Refining Your Choices For Portfolio Additions $ALJ $DK $HFC $TSO $VLO

If you haven’t taken a look at refining stocks recently you are missing out.  We have a few that can fulfill most investors needs whether you like growth or dividends.  Which is why we continue to feature most of the stocks on this list.

Traditionally, refining stocks have been the despised children of the energy industry and with good reason. A history of needing heavy capital expenditure combined with paper thin margins make for a poor business environment. However, this last month, I have been writing on how the refining niche has completely turned around, as oil market imbalances are radically broadening crack spreads and turning many refiners into cash flow juggernauts.

The segment traditionally offers good dividends. Yields for most refiners are a bit thin at the moment due to recent share price advances. Despite that, this looks like a time when both growth and dividend investors can both happily invest together. But do all refiners benefit from this new environment? I laid the ruler over five refiners: Alon USA Energy (ALJ), Delek US Holdings (DK), HollyFrontier Corp. (HFC), Tesoro Corp. (TSO) and Valero Energy (VLO).

Market Imbalances

Since September, I have been writing about the historical market imbalances in crude oil. Many benchmark crudes are trading at high levels due to regional shortages in Europe, market disruptions caused by after affects of the Arab Spring, as well as unease over Iran. Evidence is Brent Crude spot price on October 4 at $111.94.

Meanwhile, many mid-American benchmarks are selling at much lower levels. On October 4, North Dakota Sweet traded at $70.09, and North Dakota Sour at $64.09. Even West Texas Intermediate is selling at a discount to $91.71, a $20 discount to Brent.

When Crude is Not Just Crude

A complication in playing into these market imbalances is the very nature of crude and the refining process. Energy companies like Exxon Mobil (XOM) and Conoco (COP) produce the oil. They either refine it themselves or send it to independent refiners to break it down into the products we use: gasoline, chemicals, asphalt and a myriad of other key elements of our modern economy.

But all oil is not the same. Crude is rated by a series of measures. The most common are:

  • Heavy/Light – a measure of the density of the crude as well as the amount of solids in the oil
  • Sweet/Sour – a measure of elements like sulfur that make the oil easier or more difficult to process.

Overall the most economically attractive oil is Light and Sweet. It is easy to refine and yields a higher ratio of the highly priced combustibles like aviation fuel and gasoline. On the opposite end is Heavy Sour, more difficult to crack and yielding higher percentages of less valuable compounds.


Gas prices have exploded in California following supply disruptions. On top of a planned maintenance shutdown of a Phillips 66 (PSX) refinery, a power outage stymied an Exxon Mobil plant while a Chevron (CVX) also had a maintenance disruption. This comes at a time when refineries are also transitioning their equipment to a “winter blend” of gasoline, so inventories are low. Pump prices have gone through the roof. However, it looks to be gas retailers increasing prices as a result of the disruption news as opposed to a massive price boost by refiners.

Alon USA Energy

Alon owns and operates sour and heavy crude oil refineries in Big Spring, Texas, and Paramount, Long Beach and Bakersfield, California (collectively known as our California refineries), as well as a light sweet crude oil refinery in Krotz Springs, Louisiana.

Delek US Holdings

Delek is the smallest refiner of this group, with two refineries, in Tyler, Texas and El Dorado, Arkansas. It directly benefits from the improving Gulf Coast crack spread. In addition to refining, it also has two divisions that also supply, transport and retail so it is more diversified downstream than some of the others on this screen. The earnings of Delek took a hit when its Tyler plant had to go down for some extended maintenance in 2010. It is now up and running and earnings are accelerating.

HollyFrontier Corporation

HollyFrontier is long in my portfolio. I consider it a hidden dividend tiger because of a lot of oddities in its numbers. The historical fundamentals can be confusing because it is a new issue formed at the merger of Holly Corporation and Frontier Oil in July 2011. Most historical numbers only show Holly’s numbers, so recent profitability and earnings success show up on screens as a recent spike, instead of steady growth from two combined entities.


Tesoro has a recent closing price of $43.24 off a 52-week range of $18.90-$44.73. Earnings per share are at $4.65 with a PE Ratio at 9.3. It pays a $0.12 quarterly dividend, which with the steep runup lately yields only a 1.09% yield. It has a current ratio of 1.28 and this has been widening over the last year as the company has further solidified its finances.


Valero is at the top of the news as it suspended gasoline sales into the California spot market to concentrate on providing gasoline to its own stations. It is well positioned to earn great benefits from market imbalances, not to mention the California bubble. Its issue is its size. With a refining capacity of over 2.6 million bpoe, it is roughly 8-10 times larger than the other refiners on this list. Of course, Valero is the largest independent refiner.

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