Oil prices crashed last week as investors placed further bets on a slowing global economy, especially after what is happening in Europe and China. Verdict may not be out as yet if the call regarding oil price is correct and instead of breaking heads over oil prices, investors would do well to focus on undervalued plays which are neutral to prices. Oil refining space remains one such area which stands neutral if not positive to drop in global crude oil prices. Alon USA Energy, Inc. (NYSE:ALJ), Western Refining, Inc. (NYSE:WNR), and Northern Tier Energy LP (NYSE:NTI) are three undervalued plays in this sector. Here is what makes them hot:

Oil prices

Alon USA Energy, Inc. (NYSE:ALJ) is a Texas based independent refiner and marketer of petroleum products. The company has majority of its operations in the South Central, Southwestern and Western regions of the country. What makes this stock is a healthy correction which has shaved off some 17 percent from its price over the last month. What we have now is a growing and stable business priced at an earnings multiple of 15. What’s more, its improved profitability reduces the multiple to 11 when adjusted for future earnings. The correction is healthy and only adds to the stock’s attractiveness as there is no factor impacting its fundamentals. In fact, the company’s revenues grew 3.8 percent during the latest quarter to $1.95 billion. On the profitability front, it swung to a profit of $22 million, posting third consecutive quarter of black ink. The only concern with this company is the debt equity ratio of 1 which can put pressure on its margins in future, although it is not very high considering the capital intensive industry it operates into.

Elements of retail play

Somewhat similar is the case of Western Refining, Inc. (NYSE:WNR) which is an independent crude oil refiner and marketer of refined products. In addition to downstream oil operations, the company also operates service stations and convenience stores which are classified under the retail group. The segment contributes 12.5 percent of the topline. Although its margins are significantly less as compared to refining segment, it is a nice diversification. The stock has moved in the range of $ 16.05 – $39.27 during the past 52 weeks and is currently available at $31 after a 15 percent correction during the last month or so. The stock has generally positive ratings from analysts indicating strong fundamentals and prospects of better earnings. This was highlighted in the fourth quarter ended December 31 during which, the company reported a profit of $207 million compared to a loss of $64.5 million in the same period a year ago. This was despite the top line contracting marginally. Western Refining scores on the front of leverage too. With a debt equity ratio of just 0.56, it is among the least geared companies.

Dividend champion 

There is nothing like a generous dividend payout at decent stock prices and Northern Tier Energy LP (NYSE:NTI) is just that. The stock offers a dividend yield of 19.3 percent at current market price of $27.1. Like other refining stocks, this downstream energy stock also saw prices coming off 14 percent over the last 30 days, contributing to this excellent yield. Although the amount of quarterly dividend it announces is a function of its operating cash flow in that quarter, the company has paid dividends in the past two quarters and there is no reason to expect a change in this trend. The company’s strong fundamentals are also underlined by forward price earnings of 6.8 and a debt equity ratio of just 0.58.

Overall, the recent drop in crude oil prices presents an opportunity to own refining stocks at discounted levels. Low oil prices are likely to spur retail demand in turn boosting volumes for refiners.