Published Thu, 03 Dec 2015 12:00 CET by TopYields.nl
According to the US Energy Information Administration (EIA), in the last five years, refinery utilization rates have increased. Lower demand for crude oil as a result of excess supply is hurting the oil producers, leading to weaker business for midstream and downstream oil players. On the other hand, both in the US and globally, refinery investment has been supported by high gasoline crack spreads.
Many investors wrongly believe that refinery utilization is the refinery’s capacity to solely produce gasoline. Therefore, they base their investment choices on a sole percentage. It is important to remember that refinery utilization is based on the operation of the crude distillation unit (CDU), one of numerous process units in a refinery, and that the production of gasoline is the result of the operation of several other downstream units in the refinery. Therefore, even if the refinery utilization rate declines, the production of gasoline may remain stable, if the downstream units are not affected.
This article discusses three companies that trade in the Oil & Gas Refining & Marketing Industry. What is impressive is that all three companies have experienced a decline of about 35% in their Q3 revenues, yet they have managed to report an extraordinary increase in their operating income and net income ,as well as a significant decline in their operating expenses. These results sustain the US refinery utilization rates, which are consistently above 90% YoY, mainly due to increased runs in the Gulf Coast and Midwest refineries. The results also sustain increased investor confidence as indicated in the fact that all three companies have significantly outperformed the NYSE Index YTD.
CVR Refining (NYSE: CVRR), a Texas-based petroleum refiner is an independent energy limited partnership company that provides refining and related logistics services in Coffeyville, Kansas, Wynnewood, Oklahoma, western Missouri, southwestern Nebraska and Texas. The company controls and operates about 336 miles of owned and leased pipelines; 150 owned crude oil transports; a network of crude oil gathering tank farms; nearly 6 million barrels of owned and leased crude oil storage capacity and nearly 4.5 million barrels of combined refinery related storage capacity.
Q3 2015 Results: CVR Refining’s revenues were down 38.5% YoY to $1.36 billion from $2.22 billion in Q3 2014. The largest contributor to the company’s earnings, Coffeyville, is in a turnaround state which explains the revenues’ slowdown in the latest quarter. On the upside, operating income climbed to $137.2 million, up 3417.9% YoY from $3.9 million, net income reached $138.9 million, up 537.2% YoY from $21.8 million and operating expenses declined 44.6% YoY to $1.23 billion from $2.21 billion in the same quarter last year. Additionally, gross profit margin skyrocketed to 14% from 2% in Q3 2014.
Dividend Growth: CVR Refining has demonstrated a dividend growth of 236.7% in the last two years delivering an annualized dividend of $1.01, yielding 18.55% at a payout ratio of 195.2%.
Future Outlook: In spite of the increases in the turnaround costs, CVR Refining is expected to continue investing money in ensuring high crude rates in the future. Also, the company’s management expects a cumulative range of 155,000 to 165,000 barrels of crude oil per day from both refineries in Q4, which is lower compared to 200,000 barrels a day of Q3. Analysts estimate an average EPS of $3.00 for the next four years, 45% higher than the current EPS of $2.07.
Tesoro (NYSE: TSO) is a Texas-based independent petroleum refining and marketing company, which primarily transports crude oil and manufactures, transports and sells transportation fuels through its subsidiaries. Tesoro currently operates through three segments in a network of about 2,267 retail stations across 16 states under the ARCO, Shell, Exxon, Mobil, USA Gasoline and Tesoro brands.
Q3 2015 Results: Tesoro’s quarter performance indicates the company’s focus on implementing its business improvement plans and efficient running of its refineries, thus creating shareholder value and effectively allocating cash. Although during this quarter weaker crude oil differentials and the turnaround costs in the Los Angeles refinery have had an impact on the company’s revenues, Tesoro managed to deliver strong Q3 results. Compared to Q3 2014, the Q3 2015 results are as follows:
- Revenues $7.75 billion, down 30.6% YoY from $11.15 billion
- Gross profit margin 30% from 15%
- Operating Expenses $6.45 billion, down 38.3% YoY from $10.45 billion
- Operating Income $1.29 billion, up 84% YoY from 702 million
- Net Income $759 million, up 91.7% YoY from $ 396 million
- Dividend growth 900% in the period 2005 – 2015 ($0.05 to $0.5)
- Annualized dividend $2.00, yielding 1.70% at a payout ratio of 15.5%
Future Outlook: Tesoro is well-positioned to achieve long-term growth. The company has realized portfolio improvements along with business strategy transformation to lower the cost of long-term borrowing and to create financial flexibility. This will allow Tesoro to drive earnings growth for the FY 2015 and to continue focusing on creating shareholder in the coming quarters. The company’s integrated business model sustains an average annual earnings growth rate of 17.37% for the next five years, while the estimated average EPS through 2017 is $10.69, 17.2% lower than the current EPS of $12.91.
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Valero Energy (NYSE: VLO) is a global company, headquartered in Texas, which engages in the manufacturing and marketing of transportation fuels, power and petrochemical products via its refineries that produce gasoline, diesel fuel, jet fuel, asphalt, petrochemicals, lubricants, and other refined products. The company’s network consists of nearly 7,400 outlets, which sell its branded and unbranded products in the United States and internationally, mainly in the United Kingdom, Ireland, Aruba and Canada. Valero Energy owns also 11 ethanol plants for the production of ethanol.
Q3 2015 Results: Valero Energy’s operating income was up 28.1% YoY to $2.14 billion from $1.67 billion, whereas net income skyrocketed to $1.38 billion, up 30% YoY from $1.06 billion in Q3 2014. Operating expenses declined 37.6% YoY to $20.4 billion from $32.7 billion in the same quarter last year. On the downside, revenues declined 34.4% YoY to $22.6 billion from $34.4 billion in Q3 2014 as a result of pipeline expansions and overall production slowdown in the sector, although the gross profit margin increased from 10% to 18%.
Dividend History: Valero Energy has returned $1.3 billion in cash to its shareholders in Q3, which included $200 million in dividend payments and $1.1 billion of 17.2 million share repurchase. Additionally, the BoD approved a 25% increase in the quarterly dividend for the second time in 2015, whereas the dividend growth since 2000 is 525%.
Future Outlook: in Q4, the company expects to see contributions from its strategic investments in McKee crude unit expansion, Port Arthur hydrocracker expansion, and from delivered crude off of Enbridge Line 9B. Regarding its dividend policy, Valero Energy seeks to reach a total payout ratio of 75% for 2015. Analyst consensus estimates an average earnings growth rate of 11.50% through 2020 and an average EPS of $8.14 through 2018, slightly lower than the current EPS of $9.51.
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