Refining Stocks Outperform Energy Sector

It has been a bloody three month for stocks in the energy group. Energy Select Sector SPDR ETF (NYSE: XLE) is lower by close to 11 percent, partially due to a collapse in the price of crude oil. But XLE has outperformed crude by a significant margin in the past month. United States Oil (NYSE: USO) is lower by 10 percent in the past month, but XLE is flat over the same period.

The divergence is attributed to a rally in refining stocks, which have outperformed the energy groups and the S&P 500 in the last 12 months. The most recent surge is a result of a fire at the giant Motiva refinery (a joint venture between Shell and Aramco), which could be down for several months, according Fadel Gheit, equity analyst at Oppenheimer.

Despite strong performance in refining stocks, valuations in this area still look attractive and stocks have low PE multiples relative to historical ranges. Because of structural changes in the energy markets, Gheit expects US refineries to continue to benefit from discounted crude costs and cheap natural gas.

"Share buybacks and dividend growth have been a key factor in refining stock performance," stated Gheit. "Given the inherent volatility in refining stocks, investors can maximize return buying well below the midpoint of the two-year price range, and selling well above it."

A few notable names in the space are HollyFrontier Corp. (NYSE: HFC) Marathon Petroleum Corp. (NYSE: MPC) Tesoro Corporation (NYSE: TSO) Valero (NYSE: VLO). All of the companies listed above have Outperform ratings at Oppenheimer.

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