The meltdown in the oil and gas sector has been so pervasive that 113 of 114 stocks grouped under “Oil & Gas Exploration & Production” in the Bloomberg database have a negative 12-month total return. The only exception is Isramco (NASDAQ: ISRL), a small oil and gas producer with properties in the U.S. and off Israel’s shores.

But as I like to remind people, the energy sector is very diverse and there are always subsectors that are outperforming not only the industry as a whole but also the broader market averages. In the first half of this year that sweet spot was occupied by the refiners.

Bloomberg’s database lists 13 companies or master limited partnerships (MLPs) with crude oil refining operations. Whereas more than 99% of all oil and gas producers presently have a negative 12-month return, only 3 of the 13 refiners (23%) have a negative 12-month return. What’s more, all 13 have a positive return for the first half of 2015. The average first half return of the refining group was 24%, compared to the 6.1% return of the Nasdaq and the 0.9% return of the S&P 500.

Below is the complete list of refiners extracted from Bloomberg’s database by our proprietary energy stock screening tool. Entries are sorted in alphabetical order and include some valuation and performance metrics of interest to investors:

• EV = Enterprise Value in billion as of July 2
• EBITDA = 2014 earnings in billion before interest, tax, depreciation and amortization
• YTD = Year-to-date total return percentage (including dividends) as of July 2
• 1 Year = One-year total return percentage (including dividends) as of July 2
• FCF = Free Cash Flow in 2014 in million
• YLD = annual yield based on the past 12 months of dividends

Do note that, in the table above, MLPs will tend to trade at different financial ratios than corporations. They will also often have much higher yields, as many are variable distribution partnerships that pay out all excess available cash as distributions. But always keep in mind that a great distribution this quarter can turn into zero distribution the next should economic conditions for refiners worsen.

The biggest first-half winner among the refiners was Alon USA Energy (NYSE: ALJ) with a first half total return of 51%. Alon owns and operates refineries in Texas, California and Louisiana with an aggregate refining capacity of nearly 217,000 barrels per day.

We made a timely call on ALJ at The Energy Strategist, adding it to our Aggressive Portfolio on March 2. While we did not capture the entire 51% year-to-date gain, we are happy with our 40% return in four months.

Our Growth Portfolio, meanwhile, benefited from double-digit gains in Valero (NYSE: VLO), Tesoro (NYSE: TSO), Marathon Petroleum (NYSE: MPC) and Western Refining (NYSE: WNR).

Of course the old adage that past performance isn’t an indicator of future results applies. Is it too late in the game for investors to jump on the refining bandwagon?

We believe strongly that there is value left in the group, even though some refiners are now fully valued or overvalued. Join us at The Energy Strategist for up-to-date recommendations on this thriving slice of the energy industry.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

The MarkWest Merger’s Real Winner    

The recent outperformance of refiners has been matched by that of their affiliated logistics MLPs, which offer investors modest yields alongside rapid distribution growth backed by dropdowns.

That outperformance, in turn, was very likely the driving force behind the big MLP merger announced this morning, in which MPLX (NYSE: MPLX), the logistics affiliate of Marathon Petroleum, will acquire MarkWest Energy Partners (NYSE: MWE), mostly via a tax-free exchange of equity.

Based on the MLPs’ July 10 closing prices, the deal implied a 32% premium for MWE unitholders. MWE units were only up 10% in early market action because in fact the merger represents a big sale of MPLX units by its sponsor Marathon on advantageous terms to MWE unitholders, who will end up owning 71% of the common units in the dramatically enlarged MPLX. Marathon’s stake in MPLX will drop from 71.5% to 21%, but on the other hand the merged entity will be roughly three times as valuable as the pre-merger MPLX.

The partnership plans to increase its distributions by 29% this year and at a compounded 25% annual rate through 2017. It will have ample scope to do that because — even after today’s 12% decline — MPLX units were yielding just 2.7%, versus MWE’s 6.1% yield as of last week.

So this is only the latest in a string of equity deals significantly limiting current payouts to limited partners in exchange for promises of faster distribution increases. Even if these are kept, as they are likely to be here and elsewhere, it will take some time to get back to the old yield levels. For example, holding the unit price constant, MPLX would have to grow its yield by 25% for four years to get back above MWE’s 6.1%.

Even then, limited partners will be getting a worse deal, because having already bought out the incentive rights held by MWE’s general partner in a prior transaction, they’ll now be subject to a 50/50 split on future profits from assets they will finance in their entirety as a result of Marathon’s incentive distribution rights in MPLX.

That’s what makes this such a great deal for Marathon, and why MPC shares were up 9% on the news in the early going, nearly matching MWE’s gain.

There are undoubtedly some cost and operating synergies to the merger and a real diversification benefit from the two parties’ disparate income streams, MWE’s coming largely from Marcellus and Utica natural gas gathering and processing and MPLX’s from the shipping of crude oil and refined fuels to and from Marathon’s refineries.

But the principal benefit here (accruing even more heavily to Marathon than the early price action suggests) is in financial engineering that curbs current payouts from MWE’s assets while encumbering future cash flows with generous sponsor incentives.

For that reason we will not advise MWE shareholders to wait for the deal’s expected closing in the fourth quarter and exchange each MWE share for 1.09 MPLX units and $3.37 in cash. The course we’re taking in our Conservative Portfolio is to cut our exposure to MWE in half today and wait for a better exit price on the rest of the position. Sell half of MWE. But note that longtime MWE investors may have tax incentives to continue as MPLX unitholders.

As for Marathon, we’re raising our target from a split-adjusted $59. Buy MPC below $70.

— Igor Greenwald