2015 was a year dominated by crashing commodity headlines (especially oil prices) and chatter of when the Federal Reserve was finally going to hike rates for the first time since 2006. The 10-15% drop in integrated energy companies like Chevron and BP may seem like a common occurrence or even 25-50% hair cuts in the smaller, more leveraged producers, but there was a bright spot in the industry for investors: select oil refiners stocks.
Below I’ll review two oil & gas refiners that have outperformed and could continue heading into the new year.
A combination of a massive oil glut and an 11-year low in light sweet crude oil prices has led to a boom in the refiners and select oil refiners stocks. Those located near key locations like the Eagle Ford shale and others are running near full capacity. With no bottom yet in site for crude oil prices (or at least a return to $70-$80 per barrel oil anytime soon), several in the space are adding capacity to keep up with demand (or lack of if you’re looking at it from a retail demand standpoint).
Phillips 66 Stock Chart (PSX) – Are Oil Refiners Stocks In Play?
Phillips 66 snapped a three week losing streak, successfully testing major support at the 2015 uptrend line. Volume was on the light side due to the holidays, possibly giving it a lower conviction in some investors eyes. However, it is important to note the bounce at the 40-week simple moving average (200-day SMA) and the finish back above the prior resistance/current support level at $82-$83. Those looking to buy the stock can place a stop loss under last week’s low of $79.47 to minimize risk. In November, the $45B midstream company topped out at $94. This remains major resistance with the key $100 psychological level just above there.
Shares of PSX trade at a P/E ratio of 11.51x (2016 estimates), price to sales ratio of 0.46x, and a price to book ratio of 1.95x. Revenue isn’t expected to reach 2014 levels anytime soon, but efficiency and profitability are on the rise given market conditions. EPS estimates are up a $1 since October to $7.72 for FY15 (earned $6.62 last year).
Phillips 66 Stock Options Trade Idea
One could buy the Feb 19 2016 $85 call for $3.40 or better.
Stop loss- $1.50
1st upside target- $6.80
2nd upside target- $10.00
Tesoro Petroleum Stock Chart (TSO) – Oil Refiners Stocks In Play?
For the last two years, shares of TSO have been trading in a nice, steady uptrend. Similar to the recent pullback in PSX and other oil refiners stocks, Tesoro fell more than $20 from the highs and is now seeing buyers step up around the bottom of the uptrending channel. It is uncertain how long it will take for the stock to reach new highs, but if the weekly chart above tells us anything it is that volatility is the only certainty for traders. Because of this I would consider longer-dated options (2-5 months out) to avoid getting faked out in the whipsaw oil market and earnings that come out in February.
The $12.6B independent petroleum refiner trades at a P/E ratio of 11.30x (2016 estimates), price to sales ratio of 0.42x, and a price to book ratio of 2.40x. Wall Street analysts collectively have an average price target of $116.69 on the stock.
Tesoro Options Trade Idea
One could buy the May $105/$125 bull call spread for a $6.65 debit or better.
This entails buying the May $105 call and selling the May $125 call, all in one trade.
Stop loss- None
1st upside target- $13.30
2nd upside target- $19.95
Keep an eye on these oil refiners stocks (and the sector as a whole) as we head into 2016. Thanks for reading.
Author is long PSX calls at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.