By Avi Salzman

Whether they drill, mine, or manufacture, energy companies have had a rocky first quarter. Refiners are the rare exception.

Refiners, which convert crude into gasoline and other products, are impacted by the larger supply-demand picture for oil, but they're more dependent on the balance between the price of oil and the fuels they make. And currently, the fuel market looks tighter than the broader oil market. The difference between the price of oil and the wholesale price of gasoline rose to $27 at the end of April, up from $13 at the start of the year.

That gap is a reflection of a fundamental difference between the oil and fuel markets today. The supply of crude oil is rising because OPEC has been increasing crude production in a bid to gain market share, but the supply of fuels isn't rising as much. There simply aren't enough refineries to turn all that crude into gasoline and diesel. Nearly as many refineries have been shutting down as have been opening this year, leaving the world in a relative deficit. LyondellBasell shuttered a Houston refinery in February, and Phillips 66 announced it plans to close a Los Angeles-area refinery this year.

Inventories of gasoline are at the low end of their five-year average and have plunged to 12-year lows on the West Coast, according to refiner Valero Energy. Diesel inventories are also low. Meanwhile, fuel demand in both the U.S. and Europe has remained relatively strong. Gasoline demand is unlikely to surge in the U.S., where it has already passed its peak, but it's still rising in many other countries where U.S. refiners export fuel. This dynamic has pushed refining margins higher -- and could continue to give the companies a boost.

"When you go through all this data, it's actually surprising we don't see stronger refinery margins," Valero Chief Commercial Officer Gary Simmons said on the company's first-quarter earnings call.

Higher profitability hasn't been reflected in refiner stocks. That opens up some opportunities. Stocks of major refiners like Valero and Marathon Petroleum have fallen this year and are down more than 20% over the past year. They trade at valuations that are below the broader market, despite their financial resilience. Earnings for both companies are set to fall this year from the sky-high levels they hit after the war in Ukraine, but analysts see them bouncing back and nearly doubling by 2027.

Valero in particular sports an attractive dividend. The stock now yields 3.9%, near its highest level in three years. It's considered a safe bet given its scale and solid balance sheet. A more speculative option would be PBF Energy, a smaller New Jersey refiner that also has operations on the West Coast. Its stock has fallen more than 30% this year and its dividend yield is 6.4%; the company says it set its payout to be resilient even in a down cycle. To bet on a mix of refiners, investors can also buy the VanEck Oil Refiners exchange-traded fund.

Yes, a deep recession would hurt refinery stocks, and fear of a downturn is one reason they've been slumping. But absent a sustained drop in economic activity, some names have the fuel to rise.

Write to Avi Salzman at avi.salzman@barrons.com

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May 02, 2025 14:42 ET (18:42 GMT)

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