Energy Sector Strength: Let’s Dive Deeper into These Refinery Stocks

The oil refineries exchange-traded fund (ETF). VanEck Oil Refineries ETF NYSEARCA: CRAKit is outperforming the broader one SPDR Fund Energy Select Sector NYSEARCA: XLE on a monthly, quarterly and annual basis.

The main components of the CRAK ETF are Marathon Petroleum Corp. New York Stock Exchange: MPC, Valero Energy Corp. New York Stock Exchange: VLO AND Phillips 66 New York Stock Exchange: PSXall of which outperformed oil stocks as a whole, as well as the broader group of energy stocks.

There are a few reasons why the oil refineries subsector can potentially outperform the broader oil and gas sector.

Refining is a downstream segment of the oil and gas value chain, which focuses on transforming crude oil into final products such as gasoline, diesel and jet fuel.

Refineries benefit from generally stable demand, even as oil prices fluctuate. Of course, economic factors play a role; in a recession, consumers and businesses will reduce fuel consumption. But refinery revenue streams are less tied to commodity prices than are drilling and other upstream activities.

Refinery revenues are more stable and less volatile

An upstream oil company is more diversified as it explores, drills and produces crude oil and natural gas. A great example is the energy giant Exxon Mobil Corp. NYSE:XOM.

But in general, for smaller companies with a greater focus on refining and related operations, the difference between the cost of crude oil and the selling price of refined products can be more stable and less volatile.

Furthermore, efficient refining operations and advanced technologies allow refineries to optimize their processes, reducing costs and increasing profit margins.

Refineries also have an advantage over drillers because regulators typically don’t impose as many restrictions and refineries can more easily implement clean energy technologies.

On the other hand, refineries often benefit when oil prices fall, as has been the general trend since October. For this reason, many institutions use a specific investment in a refinery as a hedge, while continuing to own the broader energy sector.

Marathon surpasses Exxon Mobil

This may dampen some of the volatility in oil prices and the sector.

One refinery stock that has outperformed recently is Marathon Petroleum, which operates the nation’s largest refining system. The company says it has crude oil refining capacity of about 2.9 million barrels per day at 13 refineries.

Look at the Marathon Petroleum chart versus the Exxon Mobil chart. You can see that Marathon’s uptrend started in June 2023, while Exxon Mobil has been declining since September.

Revenue and earnings growth is slowing at both companies, but investors now favor Marathon.

Marathon Petroleum earnings data from MarketBeat shows the company beat forecasts of $1.77 per share in the latest quarter.

Marathon ROE indicates efficient operations

That’s a significant margin, but another key fact will jump out at you if you check Marathon Petroleum’s financials: Return on equity is a whopping 33%, meaning that for every dollar invested, the company generates 33 cents of net profit.

This is a very healthy ratio, indicating an efficient and well-managed company.

Valero and Phillips 66 also have higher return on equity than Exxon Mobil or the other upstream energy titan, Chevron Corp. New York Stock Exchange: CVX. However, Exxon Mobil and Chevron are also showing strong ROE.

Global demand will continue to drive refinery growth, with temporary and isolated incidents including a fire at a Phillips 66 refinery in Montana and an outage at a plant BP plc New York Stock Exchange: BP plant in Indiana, reducing supply, which pushes prices higher.

The CRAK ETF tracks a global index of oil refineries, including non-U.S. exposure. That index reflects the prices of refining companies whose shares move up and down with crack spreads, an industry term that measures a refiner’s margin for turning crude oil into final products.

The chart of VanEck Oil Refiners ETF shows the ETF hovering just below the $35.55 technical breakout level. The ETF has seen strong momentum, so it is one to watch for a breakout that reflects the continued strength of the refineries subsector.

Before you consider Chevron, you’ll want to hear this.

MarketBeat tracks daily Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Chevron wasn’t on the list.

While Chevron currently has a “Moderate Buy” rating among analysts, top analysts believe these five stocks are better buys.

View the five stocks here