4 Refiners Looking Good Due to WTI Leverage

Includes: DK, FTO, HFC, WNR
by: Michael Filloon

Good earnings reports from the refiners were taken lightly on Thursday. Although margins haven't been better since 2007, The Street seemed worried the consumer is winding in its pocketbook. Friday morning was much better for this group as the jobs number was better than expected. Brent was up almost 300% compared to WTI pricing, which stimulated this sector also. The refiners look good here, and this group of four names seem to be in the best position.

Holly Corp. (HOC) reported earnings on May 5th. Its $1.58/share was $.15/share better than Thomson Reuters consensus estimates. In the first quarter of 2010, it lost $.53/share. Net income increased $112.8 million. Holly's revenue of $2.33 billion was better than consensus of $2.11 billion. Holly had significant margin increases. In the first quarter of 2010, Holly had margins of $5.56/barrel. This increased 183% in the first quarter of 2011 to $15.72/barrel. This was offset by a 3% decrease in production levels due to unplanned production downtime at its Navajo refinery.

Matthew Clifton, Holly's Chairman of the Board and CEO, reported that margins are at historically high levels, Holly's 100% processing of lower priced WTI being the reason. Year over year, it increased its earnings per diluted share by 398.1%. EBITDA increased 27596%. Holly's margins are the story behind its earnings. Its Tulsa refinery led the way with attractive margins and strong transportation fuel cracks. Unplanned production downtime at Navajo decreased revenues. Holly Corp. also receives revenues from pipelines.

Frontier Oil (NYSE:FTO) is in the process of merging with Holly. Both companies have 100% exposure to cheap WTI. Frontier had great numbers, with net income of $139.9 million being much higher than the first quarter of 2010, which was a loss of $40.3 million. It beat by $.32/share with an EPS of $1.32. Frontier's revenues of $1.91 billion topped expectations of $1.75 billion. Revenues increased 50% year over year. This was its most profitable quarter in history.

Frontier saw increased throughputs, margins and crude oil differentials. Its reasoning for across the board improvements was increasing inventory of crude oil in Cushing. The diesel crack spread increased to $25.53/barrel from $7.41/barrel in the first quarter of 2010. The gasoline crack spread increased to $15.43/barrel, a year over year increase from $6.37/barrel. Frontier reported it will continue to benefit from mid-continent crude from unconventional United States shales, and Canadian oil sands. Its average barrel of oil processed was $7 less than WTI, and $20 less than a coastal light / sweet crude. Frontier has the ability to process a significant amount of heavy and sour crude.

Delek US Holdings (NYSE:DK) beat analyst estimates handily. It had revenues of $1.1 billion compared to Thomson Reuters' estimate of $566.7 million. Delek had an EPS of 31 cents compared to estimates of 23 cents. Its net income of $16.9 million was much better than the first quarter of 2010's loss of $14.1 million. Its acquisition of Lion Oil decreased EPS by 3 cents.

Delek stated its large increase in earnings were attributed to widening of crude oil differentials. WTI sold for a discount of $11 to the price of Brent. Delek says this widening is from large inventories of oil in the mid-continent region. It had margins of $17.54 compared to $6.62/barrel. The first 3 weeks of the second quarter have seen a further increase to crack spreads. Throughput was up 7.5% year over year. Sales volumes increased 9% year over year.

Delek's retail operation declined to $6.5 million from $7.4 million in the first quarter of 2010. This company explained that higher prices pushed gasoline prices higher. This decreased total gasoline usage was also hampered by decreased retail gasoline margins.
Delek's marketing segment grew to $8.3 million from $5.8 million in the first quarter of last year. Sales volumes increased for the fifth consecutive quarter. There was a 10% increase in sales of distillates and jet fuel. Delek is a very small player in the refining and marketing sector. This company could continue to realize significant gains, but could create significant issues if unplanned maintenance is needed.

Western Refining Inc. (NYSE:WNR) is a stock I own. Western beat on revenues but had a considerable miss in EPS. First quarter EPS was 17 cents versus Thomson Reuters estimate of 30 cents. Revenues came in at $1.84 billion versus $1.66 billion consensus. Net income of $15.2 million is a large increase from last year's first quarter loss of $30.7 million. This was a loss of 35 cents/diluted share.

Western states its better earnings are due to increased margins that helped to make up for planned and unplanned downtime at the El Paso refinery. Western's total refinery gross margin was $15.77/barrel compared to the first quarter of 2010's $6.38/barrel. Its El Paso refinery has increased its use of sour crude by 10000 barrels per day. Throughput is estimated to be 120000 to 125000 barrels of crude oil per day. Western plans a full turnaround at its Gallup refinery in the third quarter of this year.

With margins at historic highs, the refining space has upside. Shale oil production has increased quickly in the United States. This will continue for decades. Since this resource is just beginning to be extracted, there could be even more oil congestion at Cushing in the short term. These four names are significantly levered to WTI and should continue to see high margins. I think this sector will continue to outperform the market.

Disclosure: I am long WNR.