One of the most profitable spaces to consider for yield and total return is in the companies that refine crude oil into gasoline, diesel fuel, jet fuel, heating oil, chemicals, lubricants and solvents among other petroleum-based products, suggests Bryan Perry, income expert and editor of Cash Machine.
These are the big categories from which refiners generate the majority of their profits. They are special in that their profits are derived by what is known as the “crack spread” or the difference between the price of crude oil and the prices of the products they refine.
The crack-spread contract allows refiners to simultaneously lock-in a specific price for crude oil to be bought. Refined products thereby can be sold to set a fixed refining margin.
When comparing the short list of publicly traded refining companies that are master limited partnerships (MLPs), there are two companies that stand out for their solid execution and attractive dividend yields.
The first is Valero Energy (VLO), the second largest pure refiner in the industry, with a market cap of about $35 billion.
Valero owns 15 petroleum refineries with a combined refining capacity of 3.1 million barrels per day that are sold wholesale and through 7,400 retail outlets. It also owns 11 ethanol plants that produce roughly 1.45 billion gallons per year.
The other refiner that catches my attention is CVR Energy (CVI), a much smaller refiner with a market cap of roughly $3.9 billion, which owns refining and nitrogen fertilizer operations. The company operates two refiners close to Cushing, Oklahoma, with a combined capacity of about 206,000 barrels per day.
Both companies are C-corporations and pay qualified dividends and many investors prefer common shares over Master Limited Partnership units where a separate K-1 filing is required.
Valero’s dividend yield is 4.37% and CVR Energy’s dividend yield is a lofty 7.83%. Billionaire Carl Icahn owns 82% of all CVR Energy shares, making it his largest holding, second only to his own company’s stock, Icahn Enterprises LP (IEP).
Shares of Valero Energy traded as high as $126.98 in the past 52 weeks and today are offered at $82 for a nice discount to new investors. Shares of CVR Energy traded as high as $47.67 in the past 52 weeks and currently sell for $38 — also a very attractive discount.
Historically, buying refining stocks in the first quarter of the year, and well in front of the summer driving season, has proven to be a successful pattern for booking sweet gains when the Memorial Day holiday comes around.