U.S. oil refiners have excelled in recent years, reaching all-time highs in the first quarter of the year, indicating strength beyond oil prices. Despite West Texas Intermediate crude oil being down by around 30% compared to its own 2022 high, the stock performance of major oil refiners like Valero Energy, Marathon Petroleum, and Phillips 66 has remained strong.
Oil refining stocks are considered attractive in a diversified or energy-heavy portfolio due to major macro factors favoring the sector. Global demand growth for energy, particularly in populated countries like India, Indonesia, and Brazil, is driving the performance of these refiners. Valero operates in various countries, while Marathon focuses primarily on the U.S. and Phillips 66 targets the U.S., U.K., and Germany.
The refining sector is somewhat overlooked in the energy industry despite its strong performance. Refiners trade at lower price-earnings ratios compared to big oil companies like Exxon Mobil and Chevron, indicating they are undervalued. The political and regulatory risks associated with big oil are not as prevalent in the refining sector, making it an attractive investment option for investors seeking exposure to the energy industry.
Financial analysis reveals that Valero and Marathon outperform Phillips 66 in terms of generating free cash flow and returns on equity. Valero and Marathon have higher capability to withstand oil price declines and reinvest their cash flows effectively. Phillips 66, on the other hand, has lower free cash flows and returns on equity, making it less favorable for long-term investment in comparison to its competitors.
There are certain risks associated with investing in refining stocks, including U.S. monetary policy implications and potential economic downturns that could impact energy demand. As we are in an election year, energy policies could also impact the sector. Diversification is crucial when considering investing in oil refining stocks, despite their attractive valuations and financial health.
In conclusion, oil refining stocks present an attractive energy play due to their resistance to oil price declines and strong financial performance. Valero and Marathon Petroleum emerge as compelling investment options within the sector, offering better financial metrics and multiyear performance compared to Phillips 66. While oil refining stocks are undervalued compared to big oil companies, investors should consider diversification and potential risks associated with the sector before making investment decisions.
