An implicit pressure and explicit saturation (IMPES) finite element method (FEM) incorporating a multi-level shock-type adaptive refinement technique is presented and applied to investigate transient two-phase flow in porous media. Local adaptive mesh refinement is implemented seamlessly with state-of-the-art artificial diffusion stabilization allowing simulations that achieve both high resolution and high accuracy. Two benchmark problems, modelling a single crack and a random porous medium, are used to demonstrate the robustness of the method and illustrate the capabilities of the adaptive refinement technique in resolving the saturation field and the complex interaction (transport phenomena) between two fluids in heterogeneous media.