Rob Black's Energy Stock Report

Bear Stearns (BSC) raised the rating on Lone Star (LSS) to Outperform based on the premiums paid for comparable companies in recent transactions and the improving earnings outlook for LSS upon completion of its investment in a seamless steel tubular plant in China.

Yesterday, IPSCO (IPS) reached an agreement to buy NS Group (NSS) for $66.00 per share in cash, a 43% premium to Friday’s closing price of NSS and a 33% premium to its 90-day average closing price. This takeover of a large U.S. oilfield tubular manufacturing company comes three months after the announcement of a similar transaction in which Tenaris (TS) agreed to pay $65.00 a share in cash for Maverick Tube (MVK), a premium of 42% to Maverick’s closing share price on the previous day and a premium of 24% to its 90-day average trading price.

In two acquisitions, two international steel companies (IPSCO and Tenaris) have agreed to pay a total of $4.2 billion for the equity of two U.S.-based oilfield steel manufacturers. Based on yesterday’s closing price, Lone Star’s equity is valued at only $1.3 billion net of its cash reserves.

Gasoline margins have been pressured by two factors: an unseasonal inventory build of 1.5 million barrels in the last 3 weeks, compared to an average draw of 5.7 million barrels in the same time period in the past 5 years, and the psychological milestone of the Labor Day Weekend, which marks the end of the summer driving season.

Gasoline prices have declined 38.1 cents per gallon, or 18% in the past three weeks. Distillate margins remain strong, however. This could be attributable, in part, to the impending implementation of the ultra-low sulfur diesel fuel regs through the distribution chain in the next 4-5 weeks. In addition, we believe actual margin realizations on distillate production for some refiners will exceed our proxy distillate margins, reflecting premium prices for diesel fuel over heating oil.