Downstream Profit Trends Looking Up (COP, CVX, LUKOY, RDS)

Downstream profit trends look favorable for our buy-recommended stocks as the summer driving season begins. While futures pricing of oil for the next six years has been trending up, so has the crack spread, or refining margin for the next twelve months (the refining margin is the futures prices of gasoline and heating oil minus crude oil).

Downstream accounts for 11% of value in our composite portfolio with buy recommendations ConocoPhillips (COP), Chevron (CVX), Lukoil (LUKOY) and Royal Dutch Shell (RDS). Estimated present value of downstream is a median 6.2 times Next Twelve Months [NTM] EBITDA. The trend in quarterly EBITDA is up with refining crack (see chart Downstream Cash Flow and Refining Crack). Contrasted with the oil and refining trend, natural gas price has declined to the lowest level relative to crude oil in four and a half years of weekly one-year and six-year futures.

Written May 30, 2006

Kurt Wulff's McDep Associates offers realtime, independent research services for investors in the energy and utilities sectors. For more information, go to www.mcdep.com or email Mr. Wulff at [e-mail].