For almost three years, and through the staggering collapse in oil prices, the refiners continued to be the last stronghold for beleaguered oil and gas investors. However, the party may be coming to an end as U.S. refiners are down 28% this year. The worrisome item is that almost all the metrics that have driven the sector so positive against the bad oil backdrop have started to sour.

A new Deutsche Bank research report points to increasing global product demand concerns, a steep climb in gasoline inventories and collapsing energy master limited partnership (MLP) valuations. The Deutsche Bank analysts are also skeptical of current demand concerns, and they see the stocks discounting a big cut in margins next year.

The Deutsche Bank team has cut price targets on many of the stocks in their coverage universe. However, they do stay positive on three top pick companies that are still rated Buy.

HollyFrontier

Deutsche Bank still feels comfortable about this smaller cap company. HollyFrontier Corp. (NYSE: HFC) is an independent petroleum refiner and marketer that produces high-value light products such as gasoline, diesel fuel, jet fuel and other specialty products.

HollyFrontier, through its subsidiaries, operates a 135,000 barrels per stream day (bpsd) refinery located in El Dorado, Kan.; a 125,000 bpsd refinery in Tulsa, Okla.; a 100,000 bpsd refinery located in Artesia, N.M.; a 52,000 bpsd refinery located in Cheyenne, Wyo.; and a 31,000 bpsd refinery in Woods Cross, Utah. HollyFrontier markets its refined products principally in the Southwest United States, the Rocky Mountains extending into the Pacific Northwest, and in other neighboring Plains states.

One positive for the company is the decline in the stock price, which is almost 40% since the beginning of December, has knocked the price-to-earnings (P/E) multiple on estimated 2016 earnings to a very modest 8.21. That is far below the 16.4 P/E that the company posted between the third quarter of 2013 and last year.

HollyFrontier investors are paid a very solid 4.25% dividend. The Deutsche Bank price objective for the stocks is $45, and the Thomson/First Call consensus target is higher at $49.23. The shares closed most recently at $30.41.
Marathon Petroleum

This top refiner rolled over after fourth-quarter earnings and may be offering an outstanding entry point. Marathon Petroleum Corp. (NYSE: MPC) has a diversified business that operates through its Refining & Marketing, Speedway, and Pipeline Transportation segments. The company owns and operates seven refineries in the Gulf Coast and Midwest regions of the United States that refine crude oil and other feedstocks, and it distributes refined products through barges, terminals and trucks, as well as purchases ethanol and refined products for resale.

While acknowledging that the company’s margins may have compressed some, many on Wall Street also expect strong revenue contribution from the assets acquired from Hess, and last year the company converted almost all the Hess stations to the company’s Speedway brand.

For the fourth quarter, Marathon Petroleum posted net income that fell by 77% from the prior year’s number. This was due in part to declines in the operating incomes of its refining and Speedway segments, partly offset by a rise in income from its midstream segment. The company also took a combined charge of $370 million in the quarter that came from the lower market inventory valuation levied on its refining and Speedway segments.

Marathon shareholders are paid a 4.08% dividend. Deutsche Bank dropped its price target for the stock to $64 from $70. The consensus price target is set lower at $58.21. Shares closed trading Wednesday at $31.67.

Valero Energy

This is another Wall Street and Deutsche Bank favorite that looks like a solid buy after a monster pullback. Valero Energy Corp. (NYSE: VLO) is an international manufacturer and marketer of transportation fuels, other petrochemical products and power. Approximately 7,500 outlets carry the Valero, Diamond Shamrock, Shamrock and Beacon brands in the United States and the Caribbean; Ultramar in Canada; and Texaco in the United Kingdom and Ireland.

Valero subsidiaries employ approximately 10,000 people, and its assets include 15 petroleum refineries with a combined throughput capacity of approximately 3.0 million barrels per day, 11 ethanol plants with a combined production capacity of 1.3 billion gallons per year, a 50-megawatt wind farm and renewable diesel production from a joint venture. Through subsidiaries, Valero owns the general partner of Valero Energy Partners, a midstream MLP.

While the company was recently removed from the Goldman Sachs Conviction Buy list, it remains one of the premiere companies in the industry, and it also boasts among the strongest balance sheets. Corporate management recently announced that it had secured an expansion of its revolving credit facility from $300 million to $750 million. That increase provides the MLP with $656 million in total liquidity with which to continue acquiring Valero Energy’s midstream assets in 2016. Better yet, thanks to a leverage ratio (debt to EBITDA) of just 1.1 times compared to the industry average of 6.2, Valero Energy Partners should have little trouble accessing additional cheap debt markets.

Valero investors are paid a 4.38% dividend. The Deutsche Bank price target for the stock is lowered to $87 from $88, while the consensus price objective is at $80.79. Valero closed Wednesday at $54.88.

Clearly the segment already has been tagged along with other energy companies. However, investors looking for an energy play with less risk, and dividends that should remain covered, should look to these three as possible portfolio additions.

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