Refiners Finally Increase Margins

One of the few groups in the energy sector that didn't benefit from the huge run-up in oil in the first half of 2008 was the refiners.  As oil prices spiked, the refiners were unable to pass those same price increases on to the consumer.  This squeezed margins, and earnings estimates (along with share prices) dropped significantly.  This is why prices at the pump didn't double from $3/gallon to $6/gallon when oil doubled from $70 to $140. 

Now, on the other hand, oil prices have declined from $140 to $70, but prices at the pump haven't been cut in half.  This means the refiners are finally seeing an increase in their margins, and as shown in the chart below, earnings estimates for Valero (VLO) (a key refiner) have spiked up quite a bit over the past two months.  VLO's stock price has not spiked up over the past few months, however, so there may be an opportunity there.

click to enlarge

Comments

[alphaomega:]

Have you considered what is called the "Crack spread", the bread and butter of how refiners make money? Why don't you draw a graph against that and the stock price. It will give a better idea on whether refiners are truly undervalued.
Also Gasoline futures prices have halfed from $3 to $1.75 with oil plumetting from 147 to 70.

FYI, please do not post such misinformed articles. A lot of other others on your site have written about this in great detail and given better insights.

2008 Oct 21 02:21 PM

[epeon:]

I have watched VLO over the years but I have not really invested in it. This is mainly because no matter how well VLO does, it never returns its cash to its shareholders in the form of cash. So, no dividend means I don't buy.

2008 Oct 21 04:04 PM

[G. Kahn:]

For Valero, in addition to the crack spread, the heavy/sour discounts are also quite important, as is the differential between gas/distillate futures and pump prices.

Valero owns a very large number of retailers. This has not been a factor for years, as gas stations have made minimal profits on gas, and have sunk more and more cash into the holding tanks. Last Q and current Q will see real profits on these operations, however, and high cash flow.

2008 Oct 21 04:29 PM

[rcraig:]

Think about it. The chemicals the refineers use also have a price. You can't crack crude to turn it into any usable petro product without certain chemicals.
I wonder how the chemical companies did when the crude prices spiked.
For a quick snap shot take a look a Quaker Cheicals

2008 Oct 21 07:00 PM

[Shaggieman:]

Costco sells the cheapest gas around here and they could do even better if they bought their own refinaries. There's plently of refinaries out there selling for the cost of the products stored in there tanks. Great opportunity.

2008 Oct 22 11:00 AM

[Recourse Bob:]

Don't forget that the decrease in the price of crude and refined products is due to demand destruction resulting from the economic downturn. Decreased demand results in excess capacity for refiners. Excess capacity results in greater competition among refiners which can keep their margins low, but certainly somewhat higher than the margins earned in the first half of 2008.

2008 Oct 22 04:33 PM