Why Oil Refiners Are Among the Best Energy Stocks to Buy Now

Shale oil production continues its upward path, increasing overall U.S. oil production and making specific groups of energy stocks among the best to buy right now.

In fact, the U.S. Energy Information Agency (EIA) reported last month that domestic oil production surpassed the 7 million barrel a day level, the highest point in nearly 20 years. Production this year, the EIA says, will rise by another 14%.

This is obviously good news for the companies producing that oil, and it gets even better. Many industries outside the energy sector, including chemicals and railroads, have benefited from the shale boom.

But there is one subsector in the energy industry that has reaped the rewards of plentiful oil from the Bakken and other areas more than any other, and that's the refining industry.

Refining Industry Turnaround

The refining sector has been perhaps the most scorned part of the energy industry.

Investors shunned it for many years because U.S. refiners had a difficult time making money. This was thanks in a large part to refineries (particularly on the East Coast) having to import costly foreign oil.

Even a few dollars less per barrel of oil in cost savings is huge to refiners' bottom line. Take Phillips 66 (NYSE: PSX) for example.

A spokesperson for the company, Dennis Nuss, told the Boston Globe "A savings of $1 per barrel across our entire refining system is worth several hundred million dollars of net income to Phillips 66."

With the flood of oil from North Dakota and Texas, domestic crude oil prices are much lower than the global benchmark Brent crude oil. The difference can be in the $15-$25 per barrel range.

This has made the U.S. refining industry very competitive on a global scale. The industry is now exporting record amounts of refined products such as diesel fuel to destinations overseas like Mexico.

Robin West of the energy consultancy PFC Energy said to the Financial Times, "The entire structure of the U.S. refining industry has been turned on its head. Up until recently, oil was imported and refined on the coast and then transported inland. Now the crude is being produced inland and sent to the coasts. It's a goldmine for the refineries that have access to it [domestic oil]."

That idea has not been lost on investors looking for energy stocks.

These Refiners among the Best Energy Stocks to Buy Now

The Bloomberg S&P Supercomposite Oil & Gas Refining & Marketing Index has gained about 80% in the last year.

PFC Energy published a recent analysis that showed that in 2012 stocks of U.S. refiners jumped by between 57% and 105%. This was their best showing since the 2008-2009 decline in oil prices and collapse in refining profit margins.

Some the biggest winners so far have been the companies with refineries inland, close to where the oil is being produced, like these U.S. refiners.

One such company is HollyFrontier Corp. (NYSE: HFC), which has refineries in Wyoming, Kansas, Oklahoma, Utah and New Mexico. The company is so flush with cash that it recently raised its dividend by 50% and declared a 50 cent a share special dividend. Not surprisingly, its shares more than doubled last year.

Another company that may benefit by its proximity to Bakken oil is Calumet Specialty Products Partners L.P. (NYSE: CLMT). This limited partnership, which yields about 7%, is building a 20,000 barrel a day refinery in conjunction with MDU Resources. The refinery, located in Dickinson, ND, will produce diesel fuel.

CLMT produces specialty petroleum products and already has an oil refinery in Superior, WI. 

But by no means does it mean that companies with coastal refineries are being left behind. These firms are still getting their hands on cheap domestic oil.

Phillips 66 has put into place a plan to purchase 2,000 rail tank cars to transport crude oil from the Bakken in North Dakota to its refineries on the East Coast.

Even Valero Energy Corp. (NYSE: VLO), which has half of its refineries on the Gulf Coast, is benefiting. The reversal of the Seaway pipeline is a factor helping refineries like Valero's in this region. This pipeline once took oil from Texas to the hub in Cushing, OK. But now that flow has been reversed.

One final point: Investors should not overlook the fact that refineries are also benefiting from all the abundant, cheap natural gas in the United States currently. That is a major input cost for refineries. It should also keep a favorable tailwind behind the industry for the foreseeable future, benefiting those investing in energy stocks.

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