Energy sector strength: Drill down with these refinery stocks

The oil refiners' exchange-traded fund (ETF), the VanEck Oil Refiners ETF NYSEARCA: CRAK, is outperforming the broader Energy Select Sector SPDR Fund NYSEARCA: XLE on a one-month, three-month and one-year basis. 

The top components in the CRAK ETF are Marathon Petroleum Corp. NYSE: MPC, Valero Energy Corp. NYSE: VLO and Phillips 66 NYSE: PSX, all of which have been handily outperforming oil stocks as a group, as well as the broader group of energy stocks.

There are a few reasons why the sub-industry of oil refiners can potentially outpace the wider oil and gas industry. 

Refining is a downstream segment of the oil and gas value chain, focusing on processing crude oil into end products like gasoline, diesel and jet fuel.

Refiners benefit from generally stable demand, even as oil prices fluctuate. Of course, economic factors play a role; in a recession, consumers and businesses will cut back on fuel use. But refiners' revenue streams are less tied to the underlying commodity prices than are drillers and other upstream businesses. 

Refiners' revenue more stable, less volatile

An upstream oil company is more diversified in that it explores, drills and produces crude oil and natural gas. A prime example is energy giant Exxon Mobil Corp. NYSE: XOM. 

But in general, for smaller companies with a greater focus on refining and related operations, the difference between the cost of crude oil and the selling price of refined products can be more stable and less volatile.  

In addition, efficient refining operations and advanced technologies allow refiners to optimize their processes, which reduces costs and enhances profit margins. 

Refiners also have an advantage over drillers because regulators don't typically impose as many restrictions, and refiners can more easily implement clean-energy technologies. 

In a twist, refiners frequently benefit when oil prices head south, as has been the broad trend since October. For that reason, many institutions use a refinery-specific investment as a hedge while continuing to own the wider energy sector. 

Marathon outperforming Exxon Mobil

That can dampen some of the volatility of oil prices and the industry. 

One recently outperformed refiner stock is Marathon Petroleum, which operates the nation's largest refining system. The company says it has about 2.9 million barrels of crude oil refining capacity per day across 13 refineries.

Look at the Marathon Petroleum chart versus the Exxon Mobil chart. You can see Marathon's uptrend began in June 2023, while Exxon Mobil has been declining since September. 

Revenue and earnings growth is slowing at both companies, but investors are favoring Marathon now.

MarketBeat's Marathon Petroleum earnings data show the company beating views by $1.77 a share in the most recent quarter. 

Marathon ROE indicates efficient operations

That's a significant margin, but another piece of fundamental data will jump out at you if you check the Marathon Petroleum financials: The return on equity is a whopping 33%, meaning that for every dollar invested, the company generates 33 cents in net income. 

That's a very healthy ratio, indicating an efficient, well-managed company.

Valero and Phillips 66 also have a return on equity higher than Exxon Mobil or the other upstream energy titan, Chevron Corp. NYSE: CVX. However, Exxon Mobil and Chevron are also showing strong ROE. 

Global demand will continue driving refiners' growth, with temporary, isolated incidents, including a fire at a Phillips 66 refinery in Montana and an outage at a BP plc NYSE: BP facility in Indiana, reducing supply, which pushes prices higher. 

The CRAK ETF tracks a global index of oil refiners, including non-U.S. exposure. That index reflects prices of refining companies whose stocks move up and down with crack spreads, an industry term that measures a refiner's margin for processing crude oil into the end products.

The VanEck Oil Refiners ETF chart shows the ETF hovers just below a technical breakout level of $35.55. The ETF has some strong momentum, so it's one to watch for a breakout reflecting continued strength in the refiners' subindustry.