In the first quarter of the year, U.S. oil refiners reached all-time highs, showcasing strong stock performance despite a decrease in oil prices. This indicates that the strength of these companies goes beyond the fluctuations in oil prices. Valero Energy, Marathon Petroleum, and Phillips 66 are the main U.S. oil refiners that have been performing exceptionally well in recent quarters.
Major macro factors, such as global demand growth for energy, are working in favor of oil refining stocks. The growth of populated countries like India, Indonesia, and Brazil is driving this demand, providing tailwinds for the refining sector. Valero Energy Corp., Marathon Petroleum Corp., and Phillips 66 are among the top players in this sector, with operations in various countries.
The low valuation of oil refining companies has led them to be somewhat overlooked in the energy sector. Compared to big oil stocks like Exxon Mobil and Chevron, which have higher price-earnings ratios, refiners trade at a relative discount. This undervaluation has caught the attention of market participants, leading to strong performance in the refining sector.
Financial metrics and valuations show that Valero and Marathon outperform Phillips 66 in terms of generating free cash flow and return on equity. This indicates that Valero and Marathon have better financial health and are more capable of withstanding oil price declines. While Phillips 66 has a higher dividend yield, its lower free cash flows and ROE make it more vulnerable compared to its competitors.
While investing in oil refining stocks can be attractive due to their resistance to oil price declines and strong financial health, there are risks to consider. The U.S. monetary policy and potential recession could impact energy demand, affecting refining companies’ revenues. Additionally, the upcoming election year could bring political uncertainties that may affect the sector. Diversification is recommended when investing in refining stocks to mitigate these risks.
In conclusion, oil refining stocks offer an attractive investment opportunity, with Valero and Marathon Petroleum standing out as top choices due to their strong financials and performance. Despite potential risks from economic and political uncertainties, the undervaluation of refining stocks compared to big oil presents an opportunity for investors. Overall, the refining sector may be in the midst of a multiyear rally, making it a compelling investment for those looking to gain exposure to the energy industry.
