Record, for this time of the year, gasoline prices is a big news item. With gasoline prices above $4.00 per gallon in many parts of the country and a high probability of higher prices going into spring and summer, somebody has to be making money on these high fuel prices. The three refining companies discussed here produced significant profit increases in 2011, and the high gas prices of early 2012 are a good indicator they can do well again this year.
Half a dozen years ago, one publicised worry was the growing consumption of gasoline would soon overcome the refining capacity in the U.S. However, as a New York Times article from 2009 points out, the boom in energy consumption ended quickly and by 2009, refiners were shutting down refineries due to over capacity. Now a new reality has returned profitability to the U.S. refining industry. The domestic refining industry has modernized and increased efficiency to the point it can refine both domestic and imported crude oil and export gasoline and diesel fuel at significant profit margins. Although Americans are using less gas, they are competing with foreigners who also want U.S. refined products.
The majority of refineries are either owned by one of the big integrated oil companies or are stand-alone entities. Three publicly traded companies are close to pure play investments on crude oil refining -- drawing the majority of revenue from refining crude and selling or marketing the resulting products.
From small to big, we'll start with Tesoro Corporation (TSO). Tesoro owns seven refineries. Three are on the U.S. West Coast and the balance are in Alaska, Salt Lake City, Mandan, ND, and Hawaii. The company is in the process of selling the Hawaii refinery. A new management team took the reins of the company in 2010 with a three-year plan to increase efficiency and improve profitability. So far results have been impressive. Tesoro lost $1.00 per share in 2009, trimmed the loss to 21 cents in 2010, and posted $3.81 per share profit in 2011. The West Coast emphasis can challenge the company's profitability at times, such as in the 2011 fourth quarter when a loss was posted. But Tesoro's western refineries are well situated for exports to Asia.
HollyFrontier Corp. (HFC) is the $7.5 billion market cap result of the 2011 merger of Holly Corporation and Frontier Energy Company. Holly made several refinery purchases from larger oil companies over the last 10 years and HollyFrontier currently owns five refineries serving the Rocky Mountain, mid-continent and southwest regions of the U.S. A recently completed company owned pipeline from Salt Lake City to Las Vegas, allows the company to bring its lower cost products into the highly profitable Vegas market. HollyFrontier is regarded as one of the better run energy companies and has produced the best stock price returns of the three companies discussed here for the most recent one and five-year periods. HollyFrontier also owns 11 million units and the general partnership stake in Holly Energy Partners, L.P. (HEP).
Valero Energy Corporation (VLO) is the largest independent U.S. refining company, owning 16 crude oil refineries and 10 ethanol plants. The ethanol plants were picked up at excellent prices out of the VeraSun Energy bankruptcy. Valero has developed its refining system to be able to process a wide range of crude oil types and qualities. In a recent earnings report the company noted it had processed 86 different types of crude to maximize the profit from price differentials. In 2012, Valero will complete three hydrogen processing plants which will be able to process natural gas into gasoline. At current prices, natural gas costs about $16 for a barrel of oil equivalent energy. The natural gas sourced gasoline will be blended into crude oil gasoline to reduce the cost. The new hydrocracker plants also allow Valero to increase production of more profitable diesel fuel. Valero is the prime benefactor of the increased export of U.S. produced gasoline and diesel fuels, accounting for one-quarter of the total exports.
The share prices of these refining company stocks can be volatile, reacting to every move in the price of crude oil. The Wall Street analysts are all over the map with their earnings estimates on these stocks. The contention here is high gasoline prices and strong export sales will allow these companies to earn profits at or above the high-end of the estimates and 2012 will be a very good year for shareholders.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.