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Oil Plays: Refining and Shipping

09/12/2013 7:00 am EST


John Buckingham

Editor, The Prudent Speculator

Although we always recommend that investors maintain a highly diversified portfolio, two of our latest featured ideas are in the oil sector; one is a refiner and the other is an oil shipper, notes value investor John Buckingham, editor of The Prudent Speculator.

HollyFrontier (HFC) is one of the largest independent petroleum refiners in the US, with operations throughout the Midwest, Southwest, and Rocky Mountain regions.

Through five complex refineries (which allows Holly to process lower cost heavy sour crude into a higher percentage of fuel), its subsidiaries produce and market gasoline, diesel, jet fuel, asphalt, heavy products, and specialty lubricant products.

We like that its refineries are in good locations, with relatively easy access to multiple pipeline networks, and that it sells its products in some of the fastest growing markets in the country.

We believe the combination of refinery complexity, crude flexibility, and growth markets gives HFC strong competitive advantages.

The firm has a strong balance sheet that sports over $4.90 of net cash per share. HFC generates strong free cash flow, that, coupled with the balance sheet, supports management's ability to continue to pay, not only regular dividends, but also special dividends.

While most publications will show a 2.7% yield for HFC, including special dividends (that have been paid since Q3 2011), the actual payout has been better than 7%.

Ship Finance International (SFL) primarily engages in the transportation of crude oil and oil products, dry bulk, and containerized cargos, and in offshore drilling and related activities.

SFL has a fleet of 65 vessels and rigs, which includes: 17 Very Large Crude Carriers (VLCCs), 15 container vessels, 12 oil/bulk/ore vessels, seven Suezmax vessels, six offshore supply vessels, one jack-up drilling rig, two semi-submersible vessels, two chemical tankers, two car carriers, and one drillship.

While near-term headwinds persist in the oil tanker market, we like that SFL continues to diversify its fleet, moving more heavily into dry bulk, container transportation and drilling.

Long term, we believe that elevated crude oil prices and the demand for global energy infrastructure will benefit the company.

We are also encouraged by SFL's $5.8 billion of contracted revenue backlog, with 68% of that via contracts that have ten or more years remaining on them. Ship Finance shares currently offer investors a juicy 10.1% yield.

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