Alon Energy Should Grow Alongside Oil Prices

On November 8, 2006 Alon (ALJ) reported results for the third quarter 2006. Excluding special items, net income was $46.5 million, or $1.00 per share, compared to $19.4 million , or $0.45 per share, for the same period 2005. Including special items, net income was $38.1 million, or $0.82 per share, compared to $24.4 million, or $0.57 per share, for the third quarter of 2005. They also held a conference call with analysts that provided additional information.

Alon completed the acquisition of Paramount Petroleum (Paramount) on August 4, 2006 with an effective date of July 31, 2006. The results for the 3rd quarter include the operations of Paramount for August and September. They also include the results of 40 stores acquired from Good Time Stores for July, August and September. On September 28, Alon completed the acquisition of Edgington Oil Company (Edgington). The acquisition of Edgington had no impact on the third quarter results for Alon.

With the acquisition of Edgington and Paramount, management expects to increase the barrels per day from acquired refineries from 51,000 per day to 90,000. In the 4th quarter they expect to achieve 60,000 to 65,000 barrels per day. This is an increase of 11,000 to 15,000 barrels per day. At $50 oil this is $550,000 to $750,000 in revenue per day or $50 to $69 million more in revenue for the 4th quarter. The company will also add a hydro cracker to the California refinery to improve margins.

Management also expects to reduce inventories of product that will generate $50 million in cash. They have approximately $500 million in debt to pay down before they expect to make any more acquisitions. However, if an excellent opportunity were to show it self, they would consider it.

Alon has become one of the largest producers of asphalt in the country. They are able to use the residual from runs through the refineries of sour and heavy crude. They are now capable of producing over 2 million tons of asphalt per year. The asphalt segment for the company offers excellent margins and operating profits with oil at $50-60 per barrel.

Alon has good management in place and the company's primary owner is the Israel business man David Wiessman. Mr. Wiessman is the Chairman of Alon Energy USA and President of the Alon Group in Israeli. He has been in the oil business for most of his business life, starting with his family's retail gas station.

The price of oil is a significant driver of revenues and margins. With the recent drop in the price of oil, the price of the shares of the company fell almost 40%. The biggest risk the company faces is further decline in the price of oil. If oil remains between $50 - 60 a barrel, Alon should provide growing revenues and profits over the next year.

Disclosure: Author has no position in ALJ

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