Refiner Things: 5 Refining Stocks For 2012

For the most part, 2011 has been a good year for refining stocks and that's noteworthy considering the ever-present concerns about refining margins when oil prices jump. With just a few trading days in the year left, it looks like most of the largest U.S. refiners will see their shares finish 2011 in the green and that's something not all sectors can say. The new year could bring even more good things for investors willing to roll the refining dice. An improving U.S. economy, elevated industry consolidation and asset sales along with dwindling oil inventories could all be catalysts that drive refiners to solid returns in 2012. While refiners don't command the level attention normally reserved for integrated oil companies, there's arguably a little something for everyone in the refining group. Growth and dividend plays. Large-, mid- and small-cap names. Potential targets and potential suitors. With that, let's look at some of the refining stocks poised for big things in 2012. Marathon Petroleum MPC: Spun off from Marathon Oil MRO earlier this year, Marathon Petroleum is currently the biggest U.S. pure play refiner by market value, leading Valero VLO by a hair. Marathon Petroleum also features one of the best yields in the refining group at 3% heading into the start of trading today. Remember, refiners aren't known for their dividends the way integrated oil stocks are, so 3% isn't too bad. Marathon Petroleum has an appealing valuation at just 4.2 forward earnings and the average price target is over $47, implying very nice potential upside from current levels of below $34. On a technical basis, the stock might be a buy over $36. Valero: As we just noted, Valero is the second-largest U.S. refiner by market value behind Marathon Petroleum, but Valero has slightly outperformed its larger, newer rival year-to-date. The company has been rumored to be a potential suitor for some refining assets that Sunoco SUN has put on the block and Valero's presence in the ethanol market makes it one of the better options when it comes to ethanol investing, which has been a tricky theme over the years. While Valero yields below 3% (as of this writing), the company deserves a little bit of credit for boosting its dividend this year after slashing it in early 2010. Now the payout is the same as it was exactly two years ago. If the average price target of $29 proves accurate, Valero is offering nice value here at just over $21. Tesoro TSO: Tesoro has been on fire in 2011, soaring almost 30% while rivals Marathon Petroleum and Valero have booked small losses. The company suspended its dividend during the financial crisis and it hasn't come back yet, but if capital appreciation in 2012 mirrors what investors got this year, there probably won't be too many complaints about the missing dividend. Even with the 2011 pop, Tesoro trades at less than 1x book value and just 6x forward earnings. BP BP: We highlighted the case for Europe's second-largest oil company spinning off its downstream operations earlier this month and that's why the British oil giant makes the list. We're not saying BP will spin off its refining and marketing businesses. There are no guarantees of that. However, if BP does do that, it will unlock substantial shareholder value and probably bolster the E&P company's balance sheet and dividend in the process. ConocoPhillips COP: The third-largest U.S. oil company is following in Marathon's footsteps and spinning off its refining business next year. The new refining company could take the Phillips 66 name and be among the largest U.S. refiners. There's more good news for investors. From a conference call with ConocoPhillips CEO Jim Mulva earlier this year: "The absolute dividend of ConocoPhillips upstream as you know it today will continue, and there will be a new dividend coming from the downstream company." So an investor can buy the stock today and when the spin off is complete (maybe by June 2012 or earlier), you get not one, but two dividend-paying stocks.