Oil Prices Down? Refiner Stocks to Benefit

Oil is careening down at an extraordinary pace. Somehow the obvious beneficiary of this move has been ignored: the refiners. Refiner share prices are hugging the floor. Recall they were the darlings a year or two ago but got punished (and then some) as oil skyrocketed. Refiners had to buy that oil to make their products; their once robust profits were gone. Holly (HOC) has gone down 58%, Valero (VLO) 54%, Tesoro (TSO) 63%, Western Refining (WNR) 77%, all in a dizzying year.

So what have the refiners done in what should be their new halcyon days? After all, they can buy oil at far better prices. Gone up? No, continued to spiral down.

Lets see. Oil down from 140s to 104. Imported gasoline decreasing ($80 soon? $60?). Gas cracks are widening unusually fast -- the Gulf Coast Gas Crack 3-2-1 has gone from $10.64 to $18.36 in 2 weeks! This should be refiner heaven. At the same time, as oil prices slide, one would expect future increased consumption of gasoline as drivers have to contend with lower pump prices. Should further help the refiners.

Which one? Holly's refineries are no where near the hurricane belt. Its only debt is that recently taken on because of its huge holdings in Holly Enterprise Partners (HEP). It has $270 million in cash, shrinking share float due to large buy backs, almost a 50% share of HEP, and an asphalt company. After you factor that all out, you get their increasingly valuable refineries at next to nothing. Plus, they are upgrading their refineries to handle cheaper grades of oil.

This is the time to buy Holly and the other refiners. They are the true beneficiaries of declining oil.

Disclosure: Author holds long positions in HOC and VLO.  

Comments

[Chandler Lutz:]

Interesting article. I think the big question is will demand destruction continue in the gasoline market and will the price of gasoline fall more less than oil. I think one nightmare scenario for these refineries could be if demand destruction continues in the US and international demand in for oil picks up...While the former is quite likely the latter is less clear. This may be one reason why some of these companies carry such attractive valuations.

2008 Sep 10 02:54 AM

[PAUL&&SHARK:]

From your holdings I see you are a loser,big time.
But maybe you are right long term,how long?

2008 Sep 10 07:44 AM

[logicalsinger:]

To Paul:
Hey Rolex man, bug off with your stupid comments. This site is for grown ups.

Stephen, I am with you. At sub 10x PEs, refiners are good buys.

2008 Sep 10 08:11 AM

[John Cordes:]

Read again: Crack 3-2-1 has gone from $10.64 to $18.36 in 2 weeks.

2008 Sep 10 08:33 AM

[Roger McCoy:]

Americans historically have short term memory loss. Just as they have forgotten why our soldiers are fighting the agents of an evil cause abroad (9/11). I beleive most of my fellow citizen's will quickly forget about what occurred this year. Now that oil has come back from the stratosphere most people will adjust to the new cost. In a year or so the mortgage crisis will have subsided and people will be working again. Once they are warm and fuzzy in there homes , the same or new group of financial preditors will sell a new story causing the market to crash again. How many times has this happened since the 80's?

2008 Sep 10 01:59 PM

[ohm:]

Right on Roger! Do the pundits believe it won't get cold this winter or people will quit driving? Should we ban the sale of petroleum based products and coal starting today? Are alternative fuels ready to take over? Or will it take awhile..say ten years? In the meantime how will the proterters get to their marches. Maybe they will march from Frisco?

If someone falls off an aircraft carrier in the North Atlantic you don't try and turn the ship around to rescue them...it takes too long. Same for the energy crisis...it will take awhile so don't throw away your oil credit card just yet.

2008 Sep 11 09:43 AM

[iansane:]

VLO hit $20.00,TSO at $10.00 and sinking...

2008 Oct 07 05:35 PM