They can make money not only on producing oil but also on the crack spread as they refine their crude into higher-valued petroleum products. The other benefit of this integration is that oil refining acts as a natural hedge against falling oil prices, since their refineries benefit from lower oil prices. That helps reduce their earnings volatility. Independent oil refiners, meanwhile, focus mainly on operating refineries.
Some independent refining companies will only operate refining complexes. Others, meanwhile, have some vertical integration but don't go all the way upstream. For example, many will own midstream assets like oil and refined products pipelines, as well as other downstream assets such as petrochemical plants, ethanol production facilities, lubricant manufacturing plants, and retail gas stations. Integrated oil companies typically make most of their money producing oil, using their refining assets to maximize their per-barrel profit as well as to help mute some of the volatility of oil prices.
Independent refining companies, on the other hand, tend to make the bulk of their profits by refining oil into higher-valued petroleum products. Given that difference, investors who are interested in making money from the refining industry should focus on independent refining companies. One other thing that sets the refining industry apart from the upstream oil and gas production sector is that it's less capital intensive, which means that refiners don't need to invest as much money to maintain their operations.
Oil companies, on the other hand, need to reinvest a larger portion of their cash flow into sustaining their production by drilling new wells, especially when oil prices are lower. That leaves them with less money not only for drilling new wells that grow production but also for shareholder-friendly activities like dividends and buybacks. Oil refineries take raw crude oil and transform it into higher-value products, making money on the difference between the prices at which they buy oil and sell refined products.
This process enables these companies to generate lots of cash, the bulk of which they use to either grow their operations or reward shareholders through dividends and buybacks. These characteristics make refining stocks appealing options for investors. That's because they offer exposure to the oil market without the extreme downside that can come from lower oil prices, since refiners tend to benefit when crude declines.
This factor should make refining stocks particularly appealing to investors who own shares of an oil-producing company. They might want to consider pairing that investment with a refining stock, since it should help mute some of the impacts of oil price volatility. Aside from that, refining companies tend to be excellent dividend stocks. Not only do they tend to pay above-average dividends, but they also increase their payouts each year.
That combination makes refining stocks ideal options for income-seeking investors to consider. Discounted offers are only available to new members. Stock Advisor will renew at the then current list price. Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services. Premium Services. Stock Advisor. View Our Services. Our Purpose:. Latest Stock Picks. Skip to content. Andy Uhler May 23, Heard on:. Listen Now. Share Now on:. Stories You Might Like If oil prices are off their peaks, why are gas prices still rising? Gas prices can differ wildly around the globe. Why is that? How do we calculate supply and demand for oil heading into the future?
Why gas prices loom so large in the way we think about the economy. Even if we manage to stop using oil as fuel, plastics made from oil will be harder to give up. Also Included in. Tags in this Story.
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Independent refining companies, on the other hand, tend to make the bulk of their profits by refining oil into higher-valued petroleum products. Oil service companies and refinery services play an important role in the oil industry. Learn how both offer a compelling investment opportunity. He has also blamed major oil companies riding rising energy prices to record earnings, and giving profits to investors rather than spending.