Stocks Double in a Year, PE Ratios Remain Tiny: What's Not to Like?

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There’s been carnage in refining company shares in the past couple of days, but long-term investors might want to look at it as potential tag sale. After all, these are income-paying stocks that mostly doubled investor returns since the beginning of last year, as seen in a stock chart. But of course there are reasons they’re cheap, with PE ratios ranging from about 6 to 11.

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MPC Chart

Share prices of Marathon Petroleum (MPC), HollyFrontier (HFC), Tesoro (TSO), Valero Energy (VLO) and Western Refining (WNR) dropped between 4% and 8% in trading Wednesday and Thursday. Valero probably made everyone’s pain worse by claiming on Wednesday that new regulations for refiners, which the EPA unveiled last week, would probably cost it hundreds of millions of dollars.

Perhaps more importantly though, a couple of fundamental factors are not as favorable for refining profits now as they were at this time last year. Natural gas prices are about 70% higher now than they were a year ago, as seen in the Henry Hub Spot Price chart below. Refiners buy natural gas for the production process, so any price rise cuts into profit.

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Henry Hub Natural Gas Spot Price Chart

Also, the once-gaping spread between West Texas Intermediate Crude and Brent Crude has narrowed, and these refiners tend to buy oil at the WTI price and then sell refined products pegged to Brent.

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Brent WTI Spread Chart

So are they worth an investment now? Marathon Petroleum has attracted more buy than hold recommendations in recent quarters, but opinion on the others is quite mixed. Between the unknown costs of the new EPA regulations, potentially lower profit margins and some question about whether demand for gasoline will be weak this year, these may be bargains now for good reason.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.


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