3 Oil Refiners Built to Cash In on Higher Crack Spreads

Key Points

• Refiners are well-positioned to benefit from energy market imbalances this year and next.
• Forecasts of a 2027 oil glut predict oversupply far in the future; until then, fuel stocks are dwindling.
• Cash flow equates to aggressive capital returns and share buybacks for refining stocks and their investors.

Oil prices are elevated and are likely to remain higher for the foreseeable future. While EIA officials predict a supply glut in 2027, it won’t happen for 12 months or more, if at all.

Near term, the supply looks tight. The Iran war disrupted energy markets in a historic fashion, not only impairing production and supply but also disrupting the balance between supply and end products. The takeaway is that crack spreads, the difference in input cost and realized revenue for oil refiners, are at historically high levels and driving robust cash flow for refiners.

Up more than 100% at its peak, crack spreads are hovering in the +100% year-over-year range as of mid-year. This situation is not expected to end soon, as oil stockpiles, production, and refining remain impaired. The release of ships from the Persian Gulf is good news, but the oil trapped in the tankers is insufficient to offset the damage. As it stands, the world is burning more oil than it is producing, and in the United States at least, fuel output is increasing while oil storage levels continue to decline.

Globally, demand has shifted from the Persian Gulf and the Middle East to the United States, positioning U.S. operators for strength. Some of that demand will revert to its normal sources following the resolution of the Iran War, but not all of it. In this scenario, U.S. refiners are well-positioned to generate cash flow, pay dividends, and aggressively buy back shares.

Valero Energy: A Refining Cash Flow Machine With Buyback Power

Valero Energy NYSE: VLO isn’t exactly a pure play, as it has operations in biodiesel and ethanol, but it is as good as one. Crude refining accounts for approximately 90% of the business and is the core cash driver. Its advantage lies in its footprint, which is centered on the U.S. Gulf Coast.

This enables quick delivery from key Southwest markets to international buyers. Other advantages include its complex system, which enables multiple feedstocks, such as sour crude and WTI, and variable output to match market demands.

Highlights from the company's Q1 2026 period included better-than-expected revenue growth, earnings growth, and earnings per share (EPS) more than 3000 basis points above MarketBeat’s reported consensus. Cash flow was also significant at $1.3 billion, more than sufficient to cover the capital return. Capital returns included a 6% increase in dividends, yielding 2% at shares near $235, and share buybacks, which reduced the count by 5%. Looking ahead, the company can sustain a robust pace of share reduction even with crack spreads narrowing. The biggest risk is that the pace of share reduction slows.

Sell-side trends reveal support from this vector. Analysts, who drive both institutional and retail sentiment, have increased coverage, strengthened the Moderate Buy rating, and lifted price targets this year. The consensus of 21 views the market as fairly valued near $235, but the trend is upward, leading to the $290 range and fresh highs within the subsequent 12 months. Institutions, the visible action implied by analysts' trend, are equally bullish, with them owning nearly 80% of the stock and buying at a pace greater than $2-to-$1 this year.

Marathon Petroleum: Scale and Diversification

Marathon Petroleum NYSE: MPC is the U.S.'s largest independent refiner, with operations in the central and southwestern regions. Its diversified business includes pipelines that connect critical oilfields in the interior to the Gulf Coast. Among its highlights is a disciplined approach to capital allocation that enables balance-sheet strength, business reinvestment, and capital returns.

Details from the company's Q1 release included better-than-expected growth and windfall margin. Adjusted EPS more than doubled the consensus forecast, reversing losses posted in the prior year’s quarter.

Marathon Petroleum’s dividend is worth more than 1.5% as of mid-2026. The payment is reliable at approximately 25% of the earnings forecast, and is backed by share buybacks. Share buybacks are aggressive, reducing the count by 5.7% on average over the trailing 12 months. Sell-side support is also solid, with 19 analysts rating it a consensus Moderate Buy, a double-digit upside forecast at consensus, rising price targets, and institutions accumulating.

Phillips 66: Dividends, Distribution Growth, and Share Buybacks

Phillips 66 NYSE: PSX is another diversified downstream operator with business centered on refining. Adjacent segments include chemicals, pipelines, natural gas, and marketing. Critical details include its group-leading dividend yield, approximately 3%, capacity for distribution increases, and share buybacks.

PSX buybacks aren’t as aggressive as those of some others, but they do provide leverage, reducing the count by an average of 1.46% over the trailing 12 months as of Q1. Looking ahead, growth is expected to be underpinned by demand and expansion plans.

Analyst trends are bullish, including increasing coverage, firming sentiment, and a Moderate Buy consensus among 22 tracked by MarketBeat. They forecast a double-digit upside at the midpoint target, sufficient to reach a fresh all-time high. Risks for PSX and other refiners include the potential for narrowing crack spreads. However, with spreads at historical highs, the industry can withstand the impact and sustain its capital return long into the future.