After a brutal stretch that absolutely battered the refining industry, and a growing sense that any degree of sector normalcy may have to be put off until next year, the analysts at Jefferies that cover the refining and midstream stocks took a bold step this week and upgraded some of the top companies in their coverage universe.

While acknowledging the obvious challenges that have been presented for product demand, the analysts look beyond the near-term issues and focus on what could be some powerful data points for later this year and in 2021. They said this in the report:

We are upgrading covered US independent oil refiners and their sponsored MLPs after these stocks were pummeled by a barrage of negative news and near-term headwinds; most refining names are down >50% year-to-date. While we anticipate proliferating ‘social distancing’ responses to COVID-19’s spread will have a severe impact on 2020 refined product demand, resulting in acute financial pressure in the second and third quarter, we see the virus’s passing, low interest rates, fiscal stimulus, low energy prices, and globally destocked supply chains fueling a return to more normal conditions in 2021. Moreover, the refining group is well situated to weather this storm with strong balance sheets, robust liquidity, and long-dated maturity schedules; on our conservative 2021 estimates (-21% vs. consensus, on average), many names are trading at multi-turn discounts to historical averages.

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Here, we focused on the independent U.S. refiners Jefferies has moved to Buy from Hold and also included the firm’s top pick.

HollyFrontier

The analysts feel comfortable about this smaller cap company. HollyFrontier Corp. (NYSE: HFC) is an independent refiner that produces various refined products. The company’s operations are organized into two reportable segments: Refining and Holly Energy Partners.

The company owns and operates five refineries in Artesia, New Mexico; Woods Cross, Utah; Tulsa, Oklahoma; Cheyenne, Wyoming; and El Dorado, Kansas. In addition, HollyFrontier owns and operates Holly Asphalt, which manufactures and markets asphalt products, and owns a 32% limited partner interest and 2% general partner interest in Holly Energy Partners.

Shareholders receive a 5.85% dividend. The Jefferies price objective for the shares is $41, and the Wall Street consensus target is $46.29. HollyFrontier stock closed up over 11% on Thursday, at $23.95 a share.

Marathon Petroleum

This solid way to play the energy sector remains the top pick at Jefferies. Marathon Petroleum Corp. (NYSE: MPC) is one of the largest independent petroleum refining and marketing companies in the United States. It operates approximately 2,750 retail sites under the Marathon and Speedway brands. In addition, it operates a logistics network of pipelines, barges, trucks and terminals that store and transport crude and products.

Despite a plan to spin-off Speedway, the company announced in late February it would invest $550 million in the chain. The investment will focus primarily on converting convenience stores the company added to its portfolio through several acquisitions over the past two years — notably, its strategic combination with San Antonio-based Andeavor in the fall of 2018 — to Speedway’s branding and systems.

The company bought rival Andeavor for $23.3 billion in the biggest-ever deal for an oil refiner, creating the largest independent fuel maker in the United States. It was one of the biggest mergers in 2018. Following the deal, Marathon became the largest operator of refining capacity in the United States, and management believes the company can achieve the $1 billion in synergies that it suggests.

Shareholders receive a robust 10.02% dividend. Jefferies has a $51 price target, while the consensus target is a much higher $61.40. Marathon Petroleum stock closed Thursday at $23.14, after climbing close to 10% on the day.

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Phillips 66

This extremely diversified energy company has a long and successful operating history. Phillips 66 (NYSE: PSX) operates through four segments: Midstream, Chemicals, Refining, and Marketing and Specialties. The company holds many of these assets within its master limited partnership, Phillips 66 Partners.

The company is able to benefit from the tax-advantaged structure while still operating a more diversified operating business that also contains many assets that aren’t ideal master limited partnership assets, such as its fast-growing chemical manufacturing business and its super-profitable refined products marketing business.

Note that Phillips 66 has one of the highest paid CEOs in America.

The dividend yield is 6.61%. The $73 Jefferies price target compares to the $100.18 consensus target. Phillips 66 stock closed at $54.39, almost 8% higher on Thursday.

Valero Energy

This Wall Street favorite is a very solid energy play for more conservative balanced accounts. Valero Energy Corp. (NYSE: VLO) is one of the largest independent petroleum refining and marketing companies in the United States. It is based in San Antonio, Texas; owns 13 refineries in the United States, Canada and Europe; and has a total throughput capacity of around 2.5 million barrels per day.

Valero also is a joint venture partner in Diamond Green Diesel, which operates a renewable diesel plant in Norco, Louisiana. Diamond Green Diesel is North America’s largest biomass-based diesel plant.

Valero sells its products in the wholesale rack or bulk markets in the United States, Canada, the United Kingdom, Ireland and Latin America. Approximately 7,400 outlets carry Valero’s brand names.

Investors receive an 8.60% dividend. The Jefferies price target is $5. The consensus target is $89.47, and Valero Energy stock was last seen at $45.60, up a stunning 15% on the day.

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These top stocks have been absolutely crushed. All come with solid, dependable dividends, which at least for now look safe, and they offer investors a way to play the energy sell-off with a much lower risk profile. For balanced accounts looking for growth and income, these are outstanding picks. Plus, it should be noted that the much higher Wall Street consensus numbers likely will come down fast, so the Jefferies targets are far more realistic.

Investors seeking exposure to energy through the large-cap integrated companies may want to see which stocks are favored across Wall Street in a report we posted earlier this week.

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