The energy sector is broadly benefiting from high oil and gas prices. Demand for refined products remains strong, which has lifted the energy sector and oil refiners specifically.
Meanwhile, global supply is tight right now. This means oil refiners are rewarding shareholders with dividends and growth.
Let’s analyze three oil refiners with dividend yields above the market average, that are also growing their payouts.
Thriving in the Current Environment
Valero Energy (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/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.
U.S. refiners faced a severe downturn in 2020-2021 due to the pandemic, which caused a collapse in oil consumption. Refining margins plunged and hence all the U.S. refiners incurred hefty losses in 2020. However, the pandemic has subsided and global oil demand has recovered.
In late April, Valero reported (4/27/23) its financial results for the first quarter of fiscal 2023. The global market of refined products has become exceptionally tight due to the sanctions of western countries on Russia for its invasion in Ukraine. As a result, Valero enjoyed nearly record refining margins in the quarter and posted blowout earnings per share of $8.27, which were more than three times the EPS of $2.21 in the prior year’s quarter.
Notably, the EPS in the first quarter exceeded the previous (before 2022) record annual EPS of $7.99, which were achieved in 2015. Moreover, refining margins have remained near record levels thanks to strong demand for oil products, the permanent shutdown of some refineries around the globe in the last three years due to the pandemic and tight supply due to the Ukrainian crisis.
Valero is thriving now thanks to the aforementioned tailwinds and thus it recently raised its dividend by 4%. 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.
The stock has a 3.7% current dividend yield.
A Massive Earnings Beat
Phillips 66 (PSX) 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 early May, Phillips 66 reported (5/3/23) financial results for the first quarter of fiscal 2023. The effect of lower volumes due to turnaround activity was offset by higher realized refining margins. As a result, the operating income of the refining segment remained essentially flat sequentially, at $1.6 billion.
Thanks to improved margins in chemicals, adjusted EPS grew from $4.00 to $4.21 and exceeded the analysts’ consensus by a massive $0.65. Management stated that the pending acquisition of all the publicly held common units of DCP Midstream is expected to close in the second quarter. This acquisition is expected to increase the annual EBITDA of Phillips 66 by about $1 billion.
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 4.3%.
Go the Distance With This Refiner
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 ~7,100 branded locations. In addition, MPC owns a midstream MLP, MLPX LP (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 May, Marathon Petroleum reported (5/2/23) financial results for the first quarter of fiscal 2023. Thanks to the extremely tight supply caused by the sanctions of western countries on Russia, refining margins nearly doubled over the prior year’s quarter, from $15.31 to $26.15. Therefore, despite a low utilization rate of 89%, which resulted from maintenance activity, the refining segment grew its EBITDA from $1.4 billion to $3.9 billion and thus the company more than quadrupled its EPS, from $1.49 to $6.09.
Refining margins have remained elevated due to the sanctions of western countries on Russia. We expect MPC to post its second-best EPS in its history this year. Thanks to its unprecedented earnings, MPC raised its dividend by 30% and reduced its share count by a massive 24% last year. It also has another $9.0 billion for share repurchases, which can reduce the share count by another 20%.
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.
The shares currently yield 2.7%.