Opportunities in the Rising Gas Prices: Western Refining, Alon Energy

The summer driving season is not too far away, causing the demand for gasoline to rise along with the price per gallon. There is a seasonal pattern to the price of gasoline that rises in the spring as refiners transition to summer grade grades. This price rise begins on the West Coast, where refinery capacity is at a premium.

So what can you do to help pay for those higher gas bills? Well, how about buying a refiner who benefits from the rising price of gasoline. If you have enough cash to buy a refiner, then you do not have to read the rest of this piece. Otherwise there are several companies that might fill the bill including Western Refining (WNR) and Alon Energy (ALJ).

Western operates a refinery in el Paso, TX and hopes to close in April or May 2007 on the acquisition of Giant Industries (GI) with their refineries in the Four corners area in New Mexico and Yorktown, Virginia. This will almost double the company’s refining capacity, making the company the nation's fourth largest publicly traded, independent oil refiner. WNR will also more than double the volume of cheap sour and heavy grades of crude it can process to 25% of its overall capacity. This should help to increase their margins and as a result their profitability.

WNR 1-yr chart

Alon Energy, with their recent acquisition of refineries on the West Coast, should benefit from the higher gas prices there as well, generating a positive impact on the margins of the company. 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 of 2006 they achieved 60,000 barrels per day, an increase of 9,000 barrels per day. The company will also add a hydro cracker to the California refinery to improve margins.

ALJ also is the largest supplier of asphalt in California and Arizona, and the number two supplier in Texas. The company is experiencing higher than expected demand for asphalt and they have not even hit the peak summer paving season. They also are selling all the diesel they can make, which carries a higher margin than gasoline.

ALJ 1-yr chart

Don’t forget that Valero’s (VLO) McKee refinery recently had a serious fire that will likely remove about 1 percent of US refining capacity for about a month. While not a lot, it is enough to spoke the markets.

Look to buy on dips in price in late winter or early spring before the price of gasoline typically rises. Look to sell when the price of gasoline peaks.

Bottom line, play the rise in the price of gasoline to help pay for our higher summer travel bills.

Disclosure: Author owns shares of ALJ and WNR.