A year ago at this time, I was getting hammered in comments for suggesting that refiners might outperform exploration companies after corporate break-ups, like the one that had been just completed at Marathon (MRO) and pending at Conoco-Philips (COP) .
Since then the Conoco break-up has happened, with investors having a choice between the Conoco exploration arm and the Philips 66 (PSX) refining and distribution company. And since the May break-up, what have we here - a gain for the refiner but a fall for the explorer?
Yes, indeed. The same pattern has played out with Marathon, only for longer. Marathon Petroleum (MPC), the refining and marketing company, is up nearly 40% year to date. Marathon Oil (MRO), the exploration company, is down about 8.5%.
I'm not here to gloat. But I am here to remind y'all of something called supply and demand. When the supply of something goes up, when everyone is investing in it, then its price is going to fall in time. When the supply of something goes down, when no one is investing in it, then its price is going to rise.
As many commenters have noted, refining is not a business many people want to be getting into. It's capital intensive no matter how you slice it, final demand has limits, there's little room to speculate. And this is true around the world.
So why the gains? Because no one else was building refineries, our refiners have made us a net exporter of finished oil-based products. And with little competition, and falling input prices, refiners have been able to expand their margins substantially.
The question is, will this continue? No. The situation will adjust. Refining investments are going to rise, a bit, and balance is going to return to the space.
By this time next year, you'll be happier owning COP and MRO than owning MPC and PSX. But you'll be feeling pretty good either way - all four offer nice healthy dividends, although that of COP is the highest, yielding a fat 4.83%. And I don't expect any of those dividends to be threatened.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.