Vincent Fernando

Four U.S. Refiners: Share Pricing and Industry Strength

Yes, but they always have liquid assets such as these. I compare these companies to their own history. Thus in the past they had additional liquid assets. There will be some difference, but will it actually be realized? Or might value just fall with oil prices/ product prices. Its not dependable to try to add this value.

The key point of the piece, is that we are comparing companies by a single metric, and comparing them to themselves in the past. It gives I think a clear understanding of relative value. Once we try to start guessing what their inventory values will be, and what they were expected to be in the past, for each year from 1998 until 2008, we start adding a ton of variables with a lot of room for error.

There are other assets I have not included in the analysis, which I explain in the piece. Such as pipelines and retail operations.

The point is simply that if we just value capacity, which is the lions share of the value behind US refiners, and just compare this metric to where they have traded in the past (and in the past they had retail assets, other liquid assets as well, so its pretty much a like to like comparsion), then it seems to me very clear that these aren't bottomed out.

Then the next question then is what is one's call on the cycle. If you do indeed believe we are returning to 2006-2007 in the near future, then the refiners are cheap. But if you think we;re going to 1999-2002, then probably they are still a bit overvalued.

I nevertheless appreciate the critique. I hope i've made clear why I actually value using a simple metric to make what I feel is a very evident, strong point. One would have to show a big change in "other asset" value for each company from the past vs. today in order to overcome their apparently higher valuation vs. the past using my simple, though I believe effective, EV/Capacity metric.

I also haven't, yet at least, done a complexity adjusted capacity. I explain in the piece why I haven't, though I admit it would be useful. Basically, its based on a lot of estimates, and my goal here is to first keep it simple. If something looks cheap by my pretty austere valuation, then it will be even cheaper once we heap on other harder to value assets. if I have to heap on these harder to value assets, which are perhaps a less dependable value, (such as oil inventories, they will fluctuate a lot, and it all depends on when you finally sell them), if I have to add all this to make it cheap, then its probably better staying on the sidelines.


On Jan 05 08:47 PM pondside wrote:

> One thing you're missing, is that these companies have a lot of "liquid
> assets" such as oil and refined oil products. In VLO's most recent
> 10Q, they listed their inventory as including $4.5 billion of refinery
> feedstocks and products. In addition, the market value of LIFO inventories
> exceeded their carrying costs by $7.6 billion. So there's another
> $12 billion in enterprise value that is not reflected in your numbers,
> although I'm sure this value is smaller since oil prices have decreased
> since their 10Q report was issued due to falling oil prices.