Four U.S. Refiners: Share Pricing and Industry Strength

I admit that this is a rather experimental post. Recenlty, I have done some work that looks at valuations on U.S. independent refiners and have reached several conclusions. One of these is that current share prices, despite their substantial declines in 2008, still price-in a historically strong industry environment going forward. Thus, they are not priced for hard times, as some might believe. The four companies I looked at, Valero (VLO), Tesoro (TSO), Frontier (FTO), and Holly (HOC), are actually still more expensive in terms of capacity valuation than they were at their own share price highs of 1998-2003, at least by my analysis.

I also believe that the strongest ideas are formed via sharing and confrontation. Therefore, I have attached a rather detailed PDF to this post, which looks at the calculated historical EV/Capacity valuations for four U.S. refiners. Perhaps something similar has already been said elsewhere, but I have a feeling that it is unlikely that the same perspective had already been applied, and therefore, I hope this piece adds some value to the discussion.

Rather than imply an outright Buy or Sell opinion, simply put, it says,

U.S. refiners aren't priced for hard times; they still price-in a historically strong industry environment.

It is only meant to add one piece to a large puzzle.

Let me caution that I in no way guarantee any of its contents, and this is purely a personal opinion being presented, which could change at any time. Everyone should do his or her own due diligence. Some estimates, such as adding near-term future capacity additions to the last reported capacity, are used. Also, while I currently don't have any personal exposure to these shares, I could have exposure to them at any time without notice.

Disclosure: No positions.

Comments

[Tom Armistead:]

Very good research on a difficult area. Using complexity adjusted capacity might improve clarity given complex refineries trade at a premium.

I owned FTO at its low points in around 2002, sold it off in disgust, and missed huge gains.

I am long TSO, with my thinking based on a combination of asset valuation and a general idea that their attention to optionality around feedstocks and ouputs should enable them to improve performance vs. the crack spread. I have lost money so far.

Your chart does give me some perspecitve on relative pricing over the years I have been investing in refineries.

Jan 05 08:34 AM

[pondside:]

One thing you're missing, is that these companies have a lot of "liquid assets" such as oil and refined oil products. In VLO's most recent 10Q, they listed their inventory as including $4.5 billion of refinery feedstocks and products. In addition, the market value of LIFO inventories exceeded their carrying costs by $7.6 billion. So there's another $12 billion in enterprise value that is not reflected in your numbers, although I'm sure this value is smaller since oil prices have decreased since their 10Q report was issued due to falling oil prices.

Jan 05 08:47 PM

[Vincent Fer...:]

Yes, but they always have liquid assets such as these. I compare these companies to their own history. Thus in the past they had additional liquid assets. There will be some difference, but will it actually be realized? Or might value just fall with oil prices/ product prices. Its not dependable to try to add this value.

The key point of the piece, is that we are comparing companies by a single metric, and comparing them to themselves in the past. It gives I think a clear understanding of relative value. Once we try to start guessing what their inventory values will be, and what they were expected to be in the past, for each year from 1998 until 2008, we start adding a ton of variables with a lot of room for error.

There are other assets I have not included in the analysis, which I explain in the piece. Such as pipelines and retail operations.

The point is simply that if we just value capacity, which is the lions share of the value behind US refiners, and just compare this metric to where they have traded in the past (and in the past they had retail assets, other liquid assets as well, so its pretty much a like to like comparsion), then it seems to me very clear that these aren't bottomed out.

Then the next question then is what is one's call on the cycle. If you do indeed believe we are returning to 2006-2007 in the near future, then the refiners are cheap. But if you think we;re going to 1999-2002, then probably they are still a bit overvalued.

I nevertheless appreciate the critique. I hope i've made clear why I actually value using a simple metric to make what I feel is a very evident, strong point. One would have to show a big change in "other asset" value for each company from the past vs. today in order to overcome their apparently higher valuation vs. the past using my simple, though I believe effective, EV/Capacity metric.

I also haven't, yet at least, done a complexity adjusted capacity. I explain in the piece why I haven't, though I admit it would be useful. Basically, its based on a lot of estimates, and my goal here is to first keep it simple. If something looks cheap by my pretty austere valuation, then it will be even cheaper once we heap on other harder to value assets. if I have to heap on these harder to value assets, which are perhaps a less dependable value, (such as oil inventories, they will fluctuate a lot, and it all depends on when you finally sell them), if I have to add all this to make it cheap, then its probably better staying on the sidelines.


On Jan 05 08:47 PM pondside wrote:

> One thing you're missing, is that these companies have a lot of "liquid
> assets" such as oil and refined oil products. In VLO's most recent
> 10Q, they listed their inventory as including $4.5 billion of refinery
> feedstocks and products. In addition, the market value of LIFO inventories
> exceeded their carrying costs by $7.6 billion. So there's another
> $12 billion in enterprise value that is not reflected in your numbers,
> although I'm sure this value is smaller since oil prices have decreased
> since their 10Q report was issued due to falling oil prices.

Jan 06 01:29 AM

[Diegojames:]

Iam long Valero. My family drives 6 cars to work and school. My ex wife, her busband also drive. My community drives , the San Fernando Valley where I live North of Los Angeles drive cars. That is 10 million plus cars. Get the picture. Nothing is changing.
I am Long COP- only 2 work associates own a Prius. There are no sites to buy CNG for a car, no hydrogen stations, no battery cars TO buy- TESLA is costly- so whats not to like about VALERO?
A California utility is helping them rebuild a Texas pier facility. They will bring in LNG or something in the future or expand their energy fuels.
BUY MORE VALERO, BUY COP , BUY SOUTHERN CALIFORNIA GAS
DIEGOJAMES
NORTHRIDGE , CALIFORNIA

Jan 09 01:57 PM