Top-3 Oil Refiners for Income Investors to Earn Dividends and Future Growth
These high-dividend names could appeal to income investors thanks to some recent underperformance of the oil refining sector.
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Oil refiners have underperformed the broader market over the past year and are well off their year-to-date highs, as refining margins have fallen off from blowout levels seen last year.
Still, the major U.S. refiners are strongly profitable with durable competitive advantages. Income investors could view the recent underperformance of the oil refining stocks as a buying opportunities, due to their elevated dividend yields.
This article will analyze three oil refiners with dividend yields above the market average that are also growing those dividends.
1. Valero Energy (VLO)
Valero VLO is the largest petroleum refiner in the U.S. It owns 15 refineries in the U.S., Canada and the U.K. and has a total capacity of about 3.2 million barrels per day. It also produces renewable diesel and has a midstream segment, Valero Energy Partners LP, but its contribution to total earnings is under 10%. Valero should be viewed as a nearly-pure refiner.
In late October, Valero reported results for the third quarter. Refining margins have fallen from last year’s blowout levels, but quarterly EPS of $1.14 beat the analysts’ consensus by $0.16. Valero has not missed the analysts’ estimates for 25 consecutive quarters.
The company stated that it still expects to begin producing sustainable aviation fuel (SAF) until the end of this year. Moreover, Valero has a promising pipeline of growth projects for the next three years. These projects aim to lower carbon intensity and improve refining margins.
Valero has a competitive advantage over its peers, namely the high complexity of its refineries, which enables the company to benefit from the gyrations of oil prices and refined products by optimizing its blend of feedstock and products.
VLO raised its dividend by 5% earlier this year and currently yields 3.0%. The 2024 dividend payout ratio is expected to be roughly half of the company’s annual adjusted EPS, indicating a safe dividend.
2. Phillips 66 (PSX)
Phillips 66 PSX is a refiner that was spun off from ConocoPhillips COP in 2012. Phillips 66 operates in four segments: refining, midstream, chemicals and marketing. It is a diversified company with each of its segments behaving differently under various oil prices, in the absence of a severe recession.
In late October, Phillips 66 reported financial results for the third quarter of fiscal 2024. Refining margins contracted while the midstream segment saw its earnings decline due to seasonal maintenance costs. As a result, adjusted earnings-per-share dipped by 12%, from $2.31 to $2.04, though they exceeded the analysts’ consensus by $0.38.
Growth projects in the oil industry take many years to start bearing fruit, meaning there is a great lag between capital expenses and their resultant cash flows. Fortunately for Phillips 66, the company is currently in the positive phase of its cycle. While it has reduced its capital expenses in recent years, it has begun to reap the benefits from past investments.
In addition, the record earnings in recent years are additional testaments to the widely recognized discipline of management to invest only in high-return projects. The pandemic greatly affected the results of Phillips 66 in 2020 but the company has fully recovered from that crisis. Moreover, Phillips 66 has many ongoing growth projects in its midstream segment.
PSX stock has a current yield of 3.5%. The company has increased its dividend for 12 consecutive years. With an expected dividend payout ratio around 52% for 2024, the dividend appears highly secure with room for continued increases.
3. Marathon Petroleum (MPC)
Marathon Petroleum Corp. MPC was spun off from Marathon Oil Corp. MRO in 2011. After the acquisition of Andeavor Logistics in October of 2018, MPC has become the largest U.S. refiner, with 16 refineries and a refining capacity of 3.1 million barrels per day. It also has a marketing system that includes about 7,100 branded locations.
In addition, MPC owns a midstream MLP MPLX, which has gathering and processing assets as well as pipelines for crude oil and light products. Marathon Petroleum Corp. has a market capitalization of $47 billion.
In early November, Marathon Petroleum reported financial results for the third quarter of fiscal 2024. Refining margins plunged from a blowout level of $26.16 per barrel in last year’s quarter to $14.35. As a result, refining segment EBITDA declined from $4.4 billion to $1.1 billion. Earnings-per-share of $1.87 exceeded the analysts’ consensus by $0.78.
MPC has beaten the analysts’ estimates in 21 of the last 22 quarters. As refining margins have shrunk towards normal levels, after two years of sky-high levels, we have lowered our forecast for earnings-per-share this year from $14.00 to $10.50.
Share repurchases will help boost earnings-per-share. MPC has reduced its share count by a massive 49% in the last four years and has another $8.5 billion for share repurchases, which can reduce the share count by another 18% based on the company’s current market cap.
The acquisition of Andeavor has greatly enhanced the geographic diversification of Marathon and its potential to take advantage of fluctuations in price spreads among different types of crude oil and the dynamics of export markets. The acquisition will increase the earnings of the company and its resilience during downturns in the long run.
MPC has an expected dividend payout ratio of 35% for 2024, which means the dividend is highly secure. MPC shares currently yield 2.3%.
At the time of publication, Ciura had no positions in any securities mentioned.