Consumers would have to be living on another planet to not notice how cheap it has become to fill up the car, truck or sport utility vehicle, and with spring and summer right around the corner, Americans are expected to be driving record miles this year. That gasoline usage, combined with the huge decline in active wells and capital expenditures, could drive benchmark West Texas Intermediate (WTI) crude back to $45 this summer.

In a new research report, Merrill Lynch analysts feel that the battering in the refining stocks is close to over, and they even use a baseball term by saying the firm’s negative refining call is in the seventh inning. Led by the firm’s well-respected energy analyst Doug Leggate, Merrill Lynch has positioned its top refining picks with seasonal momentum in mind, and the firm favors mid-continent refiners. In addition, another top large cap name makes the cut and has seen massive insider buying by Warren Buffett.

Delek

This small cap refining company could bring some outstanding gains for investors with a more aggressive investing portfolio. Delek U.S. Holdings Inc. (NYSE: DK) is a diversified downstream energy company with assets in petroleum refining, logistics and convenience store retailing. The refining segment consists of refineries operated in Tyler, Texas, and El Dorado, Ark., with a combined nameplate production capacity of 155,000 barrels per day.

The company’s retail segment markets motor fuel and convenience merchandise through a network of approximately 355 company-operated convenience store locations operated under the MAPCO Express, MAPCO Mart, East Coast, Fast Food and Fuel, Favorite Markets, Delta Express and Discount Food Mart brand names. Delek also owns approximately 48% of the outstanding common stock of independent refiner Alon USA Energy.

Delek is expected to report earnings this week, and the Merrill Lynch analysts like that the company operates in geographic areas of the country that they feel are “product short.”

Delek investors are paid a very rich 4.42% dividend. Merrill Lynch has a whopping $32 price target on the stock, and the Thomson/First Call consensus target price is posted at $29.62. The stock closed on Monday at $13.58 a share.
HollyFrontier

This is another smaller cap company that the analysts feel comfortable about now. 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 operates through its subsidiaries a 135,000 barrels per stream day (bpsd) refinery located in El Dorado, Kans., 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 that 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 times P/E that the company posted between the third quarter of 2013 and last year.

HollyFrontier investors are paid a very solid 4.17% dividend. The Merrill Lynch price objective for the stock is $50, and the consensus target price is slightly lower at $49.23. The shares closed most recently at $31.63 apiece.

Phillips 66

This company has enjoyed massive buying from legendary investor Warren Buffett, as he has taken a huge stake in the refiner. Phillips 66 (NYSE: PSX) is a diversified energy manufacturing and logistics company. With a portfolio of Midstream, Chemicals, Refining, and Marketing and Specialties businesses, the company processes, transports, stores and markets fuels and products globally. Phillips 66 Partners, the company’s master limited partnership, is an integral asset in the portfolio.

The company is geographically diversified and the 15 refineries spread around the country enable it to participate in various location-specific market opportunities and also provides an advantage over region-specific competitors. Phillips 66’s refineries are integrated with transportation, marketing and commercial operations that provide crude supply flexibility. These refineries benefit from strong margins due to low feedstock costs thanks to higher proportion of onshore crude sources, which are substantially cheaper than seaborne crudes. Phillips 66 also owns or has interests in three refineries in Europe and one in Asia.

The Merrill Lynch team is very positive on the company’s diversified business mix and strong management team. While Refining unit leverage is minimized, they do see growth in other businesses supporting a lower volatility earnings stream. In today’s difficult environment, that makes good sense for investors.

Phillips 66 investors are paid a 2.77% dividend. The Merrill Lynch price objective is posted at $100, and the consensus target price stands at $93.82. The stock closed Monday at $80.87 per share.

Clearly the sector 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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