Tesoro and Valero Benefit from Higher Gross Margins

Oil prices are going down and it should be bad for all petroleum related companies, right? Well, have you guys looked at the pump prices for gasoline over the last 2 months? I took a month vacation in December and when I returned I was shocked to see the price in my gas station rocketed from 1.58 to 2.18 (a shocking 60% up), while the world oil prices are still going down. And in fact, the trend is seen nationally. The gasoline prices have gone up more than 25% since Christmas. So, who is benefiting from this? The answer is – refiners. Their gross margins have gone up from about 10% in December to as high as 50% in January.

Oil Vs. Gasoline prices

Tesoro (TSO) is profiting

The refiners seemed to have cut down their production substantially since Christmas that contributed to their widening margins. Margin makes the refiners smiling. Tesoro seems to be the rock star, followed by Valero (VLO), that have profited the biggest from this increase in margins. TSO has doubled and VLO is up 70% since November.

Being pure refiners unlike integrated petroleum companies like Exxon (XOM) and Chevron (CVX) they don't have a lot to lose from the falling Crude oil prices. Tesoro has a forward PE of around 12 and a very good PEG ratio of around 0.63 compared to XOM (1.92) and VLO (2.25). This should excite the growth investors. It has a debt of around $1.5b, but the debt to equity ratio of 0.63 appears fairly acceptable given the nature of the capital intensive business. The refinery workers strike that might have affected their production was called off a couple of days ago, and so the threat to production from that has temporarily dwindled.

The Tesoro index that is an indicator of how much profits refiners make is substantially up from last year. However, there seems to be an early indication that the value is coming down the last couple of weeks as seen in the chart below. It is not clear whether this trend will continue, and how much it will impact the revenue growth. Valero took a 4b hit last quarter from a goodwill writedown (usually results out of past acquisitions), but otherwise it appears to have a good balance sheet.

(Tesoro index, courtesy of B2I)

And finally, here is the breakdown of gas price computed by EIA:

Related articles:

http://tonto.eia.doe.gov/oog/info/twip/twip.asp

Disclosure: No positions in TSO, XOM, CVX and VLO

Comments

[Tom Armistead:]

TSO has predicted that they will increase their capture rate (the percentage of the available margin from the TSO index which they actully capture) by 20% this year. Capture rates have improved dramatically for the last two quarters.

If TSO delivers on this prediction, margins could be surprisingly high.

Feb 08 07:29 AM

[john s. gordon:]

refiners got squeezed last year when the speculators were driving $/bbl of oil thru the roof. now it's their turn to make up for lost revenue. sure you will get some grumbles @ the gas pump, i have heard plenty.
> jack

Feb 08 09:23 AM

[Bob van der...:]

Crack spreads at the U.S. West Coast refineries are an amazing $35 a barrel today. The differential between the branded and unbranded wholesale gasoline prices is now 25 cents per gallon. That is the main cause for the strengthening int the refinery crack spread as they do not have any surplus gasoline to sell in the spot market.

Feb 09 10:34 AM