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UBS Sees Big Refineries as Cheap Value Stocks After Large Share Price Correction

Lee Jackson

For much of the past year and through the first quarter of 2013, the refinery sector was on fire. The top stocks in the sector were some of the top-performing stocks overall. The stocks covered by the UBS A.G. (UBS) U.S. refining analysts are down 17% since March 31 and now trade at some of the lowest multiples in the past three years. While the UBS analysts tend to be slightly below consensus in some of the earning per share estimates, they believe that their top picks have an upside potential in excess of 22% from current trading levels. They are particularly positive about the coastal refiners, which make their current list of stocks to buy.

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CVR Refining L.P. (CVRR) sports a gigantic yield, which may decline later in the year.  Given the pronounced narrowing of the Brent-West Texas Intermediate (WTI) spread over the course of the second quarter, UBS expects management to downwardly revise its full-year distribution guidance. The current UBS price target for the stock is $30. The Thomson/First Call estimate is also at $30. Investors are paid a huge 22.5% distribution. Because it is structured as a master limited partnership (MLP), investors should be aware the distribution may include return of principal.

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Northern Tier Energy L.P. (NTI) is another MLP with a huge distribution. The company performed a month-long turnaround at the refinery in April that, according to Bloomberg data, stretched slightly beyond the 30-day duration planned for in its original throughput guidance range. Additionally, the expanded number two crude unit was expected to commence operations within the scope of the normal April turnaround period; however, indications are that it did not start up until the second week of May. Because of these events, UBS thinks the current distribution will be much lower than last quarter. Their price target for the stock is $30, and the consensus target is $29.50. Investors are currently paid a 20.4% distribution.

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Phillips 66 (PSX) has secured a number deals to deliver discounted inland crude to its coastal refineries. However, the compression of inland-waterborne crude differentials over the second quarter has put at risk the economic viability of crude-by-rail delivery to the coastal refineries. However, with the company in the middle of a $2 billion stock repurchase plan, the UBS team remains very positive on the stock. The UBS price target is $71, the same as the consensus target. Investors are paid a 2.1% dividend.

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Tesoro Corp. (TSO) also has been looking to take further advantage of the explosive growth of oil-by-rail transport. The company is planning a terminal in the Port of Vancouver capable of handling 380,000 barrels of oil per day. Accessing 380,000 barrels of cheaper U.S.-produced oil could save the company $1.37 million per day, given the current discount at which U.S.-benchmarked crude oil trades. The UBS price target for this top name is $66, and the consensus stands at $65.50. Investors are paid a 1.4% dividend. A move to the price target would represent almost a 25% gain for investors.

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Valero Energy Corp. (VLO) may be on the verge of announcing an MLP formation for the company’s midstream assets.  These assets predominantly consist of pipelines and terminals supporting its refining operations. UBS estimates an S-1 filing related to this formation is a likely second half of the year catalyst. The UBS price target for Valero is $40, and the consensus target is higher at $42. Shareholders are paid a 2.2% dividend.

After such a strong market run it may be wise for investors to review their portfolios for potential gains to be taken. While a correction like the May to June 7% drop is a possibility, it also may be wise to rotate some principal back to the refining segment. The big second quarter correction has given people interested in the stocks an ideal entry point to add the names back to their holdings.

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