coursonc's  Instablog

Ok, you guys know I like the Oil business, Ive said that before. Why? Oil is indispensable to modern day living, almost everything we do requires it, it is a commodity in limited supply, and is dwindling.
messages.finance.yahoo.com/Stocks_%28A_t...
However, oil by itself is worthless. To use oil as a fuel or for any other purpose, it must first be refined into its constituent products by a Refinery. The refinery business is cyclical, following supply and demand. The refinery is always buying Oil and the mandated percentage of oxygenante, ethanol, and refining the oil to its refined products, mainly gasoline, commonly called RBOB and distillates, which can be diesel or heating oil (HO), along with nominal quantity’s of other products such as napththa, lubricating oil, kerosene etc. One common formulae is the Nymex 3-2-1, which gives the use of 3 bbls Crude oil to yield 2Bbls RBOB, and one of either Diesel or HO, depending on prices prevalent at the time. Usually, a refiner will choose to make HO in winter as that is when its margins are strong. Thus it is a simplistic statement to observe that a Refiners profits are closely tied to the ‘Crack spread”, or the difference between what they can buy the raw product for, and sell the refined products for, as this is their ‘margin’ of profit.
messages.finance.yahoo.com/Stocks_%28A_t...
To get a quick chart of the current crack spread, copy/paste this =(28*XRB)+(14*HO)-CL
into the radio bar that says "contract", then click "get chart" below, from this link
futuresource.quote.com/charts/charts.jsp...
What you are seeing, is the profit of refining a barrel of oil and selling its products. As you can see, CS has ranged from about $2 to $14 per barrel, and is now $5.60, up from the bottom in late Sept09.
Ok, you say, all that is really great coursonc, but so what? Well, that is just a refresher on how the refiners basic profit margins work. To look at a bigger picture, we also need to see the price metrics on both gasoline and Crude, since the purchase of Crude is by far the biggest cost to the refinery.
Crude oil price is mainly controlled by OPEC. They control price by limiting or supplying Crude oil to the market, and can do so since over 60% of the Worlds oil is supplied by them. The World uses about 80.5Mbod, and, as per the EIA, they have supplied 29Mbod on average over the first 3 qtrs of 2009.
www.eia.doe.gov/emeu/steo/pub/contents.html
Opec has expressed satisfaction with Crude oil price where it is, in a range of $70-80 per barrel, thus I will conclude that Oil input price is going to be relatively constant going forward, with a slight upward tone due to continued dollar devaluation.
opec.com/
The usual reason that gasoline or distillate prices remain depressed, like all commodities, is due to high inventory supply. Thus, it is clear, that for refinery profits to increase, we need to see increased crack spreads thru higher gasoline and diesel prices, higher volumes produced, or a combination of both. Indeed, and I quote, this is exactly what is forcast by the EIA: “EIA projects the monthly average regular-grade gasoline retail price to rise from $2.55 per gallon in October to $2.70 per gallon this month. Generally higher crude oil prices through the forecast period contribute to an increase in the annual average gasoline retail price from $2.36 per gallon in 2009 to $2.81 in 2010, with prices near $3.00 per gallon during next year's driving season. Projected annual average diesel fuel retail prices are $2.48 and $2.94 per gallon, respectively, in 2009 and 2010. Higher forecast crude oil prices also raise the projected average household expenditures on heating oil this winter to $1,940 in this forecast, compared with $1,864 last winter.”
www.eia.doe.gov/emeu/steo/pub/contents.html
Here is what is really happening. The US is going thru its worst recessionary downturn in the last 40yrs, with over 10.2% unemployment contributing to low fuel use. Job related use of fuel is projected to be about 30% of the overall fuel demand, so continued high unemployment with its input on consumer discretionary income has also played a part.
The refiners have been hard hit. At first what they did, was to step up and accelerate their scheduled maintenance, and reduce the refinery ‘run-rate’, which is a percentage of what the refinery can actually produce, compared to what it actually does produce. Beyond a certain reduction, if inventory continues to climb, or demand worsens, the refiners have to start shutting down production. They can choose to hot idle, or actually ‘cold shutter’, a plant, and usually choose to close the most underperforming, or older, higher maintenance plants first. This is exactly what has already been happening. Sunoco mothballed Eagle point.
www.nj.com/news/index.ssf/2009/10/sunoco...
Valero, shut Aruba in June, and Bill is now is permanently shutting Delaware City, and reducing at Paulsboro.
www.chron.com/disp/story.mpl/business/en...
Western, which has four refinerys, shut down Bloomfield
www.businessjournals.com/ci_13774105?sou...
What this is doing, is shutting down Refining capacity, or the ability to produce products, right at the same time that Demand, in the way of increased driving and use of gasoline, Diesel and other fuel products is going to go up.
Initally, this increased demand will produce drawdowns in the relatively high inventory levels we currently have, but as levels get drawdown without being replaced, price, and thus margins will go back up. Refinerys cannot just instantly be turned on and off like a switch. It is my bet that we are going to overshoot on the shutdown side, and then scramble when demand returns.
From this chart, you can easily see that refinery utilization, as a function of operable capacity has been going down (80.89 to 79.44%), but overall both Finished Gasoline, and conventional production has gone up (8453 to 9056) and (5454 to 5963)

tonto.eia.doe.gov/dnav/pet/pet_pnp_wiup_...
Here, you can see that we are averaging about 23.4 days of supply in gasoline, about 1.4 days more than last year.
tonto.eia.doe.gov/oog/info/twip/twip_gas...
I watch almost all of the non-major refiners in this space, namely VLO, TSO, SU,SUN,CVI,FTO,HOC,ALJ,WNR and DK. Usually, the most inefficiency in the capital markets can be found in the small caps, or stocks whose total market capitulation is $200M to $2B, the smaller, usually, the better. The reason for this is because we, the small investor, can beat the institutional investors that have restrictions from buying large quantities of any one issuer, thus becoming a large shareholder, or having to file with the SEC and disclose its transactions. That narrows my interest down to three plays.
Alon (ALJ) has a market cap of $350M. Delek (DK) is similar at $352M, and then there is Western Refining (WNR) at $407M. A quick look at these three shows WNR having the lowest price/book at .51 vs .64 and .86 for DK/ALJ respectively.
You cannot pick a company on just one metric, sometimes there is a good reason its stock price is skewed in relation to others.
First, I looked at the debt: WNR has $1.07B debt with 89M shares or $12 debt/sh with .73 cash available. ALJ has $855M debt with 47M shares or $18M debt/sh with .39 cash available. DK had $342M debt with 54M shares or $6.3M debt and $2 in cash per share.
Then I look at Refining capacity. WNR has (4) refinerys, El Paso is 125Kbod, Yorktown is 70Kbod, and the two four corners combined are 40Kbod (one of which, Bloomingfield, is being shut, and ops transferred to the other, with no diminished capacity) 160 retail outlets. ALJ has (3) Gasoline refinerys and (1) Asphalt plant. Big Spring is 70Kbod, Paramount is 54Kbod, Long Beach is 34Kbod, and the Willsbridge Asphalt is 12Kbod. 300 retail outlets. For DK, they have just (1) refinery, a 60Kbod in Tyler, Tx, and a 34% interest in a private 75Kbod Lion refinery, and a whopping 450 retail outlets.
This somewhat explains the debt discrepancy between DK and the other two, as they are much smaller in Refining capacity, with more non-capital intrinsic retail outlets.
WNR total capacity is 235Kbod, ALJ is 170Kbod (12K is asphalt), and DK is 100Kbod(including their minority interest in Lion)
At this point, I am excluding DK, as they are too small, with too many retail outlets. If I wanted a retailer, I could choose 7-11 . Back to the debt. The debtload HAS to be serviceable. For WNR, it looks like it is. Western Refining generates operating profits more than sufficient to pay interest on its debt, even in this depressed market environment. Their operating margin is about 2.6% which is higher than most others. Their Q3 loss was less than expected, at $4.8M or .05 vs .06 per share, and the four corners ‘consolidation’ of two plants into ops of one, is expected to reduce expenses $25M per year. Bloomfield could be used for Biofuels, later. As of Sept30th, they have zero borrowings under the revolving credit facility. Capex was reduced from $155M to $120M, with $100M projected for 2010,and interest expenses are about $34M/Qtr.
They raised $180M recently by selling 20M shares at $9. The CEO is the largest individual shareholder, at over 8M shares, so he has a vested interest in turnaround, and he was buying at $9 back in Jun09. Total insider interest is high, at about 41%.
When Reading technicals, WNR is severely oversold here at sub $4.50, with RSI of 29 and about 17 down days in a row, way below the 50dma of $6 and I think the severe pessimism is unfounded and unwarranted. If my overall view is correct, and the US economy is pulling out of this recession, it will mean more fuel needed for those drivers going back to work, and at higher prices, meaning higher margins, and more profit for the refiners.
As an additional bonus, WNR has zero exposure to any kind of Hurricane or weather related risk, as ALL of their plants are located inland, away from GOM, and served by stable pipeline, or inland barge.
Weather mishaps that reduce capacity to other refiners are always a good event to WNR, by raising product prices.

Current Short interest is 9.3M shares, or 18% of of the Float of 52M shares, which by comparison is much higher than ALJ with 2.8% shorts. DK is 2% short. VLO is also 2.8% short right now. This makes WNR a short squeeze candidate on any good news.

I recommend a BUY on WNR sub $4.55 as a play on the recovery of US out of recession. Cheers! Disclosure, Long WNR.

coursonc

I love to buy into a company that is undervalued, undiscovered, out of favor, has investor fatigue, or is misunderstood, and unlike Buffet or Lynch, I will play the cyclicals, and even the ones without a ‘moat’ if I feel the timing on a risk/reward basis is favorable. Anyway, my favorite sector is the Energy sector, as I know this sector very well. I am always on the lookout for either beaten down value plays, out of favor commodity cyclical rotation plays, industry ‘game changers’, and watch the political and technology landscape as well, for trends and influential factors that can result in favorable conditions.
I have given a good deal of thought to the area of Electrical demand, both on a World scale, and also locally, here just in the USA. As is logical, humans continue to increasingly rely on more and more Electrical generation, for their comfort, safety, and needs, and basically just because we are lazy. You may look around you and see two computers where there was once one, an Electric can opener where there once was the manual one, an Electric Dishwasher, when it was done by hand, Comforts of HVAC instead of opening up the windows, burning wood or any other such thing, just for example. Car manufactures are thinking of making Hybrid-Electric cars running on a Battery that you can charge in your garage. Electric is just plain convenient. This is not going to stop, decrease or go away anytime soon. In the third world and developing nations, there is a super rapid pace of advancement, as the infrastructure grid is developed.
Currently most of the Electricity in the World, and the US is produced from heat engines commonly called steam turbines, from the combustion of fossil fuels, mainly burning Coal, with the remaining from Nuclear, Hydro from Dams, Oil/NG generation, usually ‘peaker plants’, and the smallest amount is from “Renewables” at about 2.4%, which could be solar, wind turbine, geothermal, biomass,and then “other” which is less than 1%. Its this ‘Other” that I want to discuss, as I feel there is a very large and undiscovered market for Utility investment going forward due to two different occurring scenarios 1) Increasing pollution controls on ‘dirty’ sources, mainly Coal fired plants, Carbon Capture Cap and Trade legislation that will penalize or make these type plants more expensive to use going forward, with pressure coming from the increased effect of greenhouse gases on our environment, worldwide. Ok, you say why the “Other” and not the Solar, Wind or Geothermal that is currently in the ‘renewables’ sector? Here’s why. Electricity for the Utility generators has to be economically cost effective, reliable and have the ability to be installed and maintained on a cost effective basis. Solar generation only makes sense in just a few locations, and only generates during the day, when the sun is shining, and is currently cost prohibitive. Wind is not always blowing, and there is opposition to the large size and landscape impact, with again only a few places these are feasible, and the transmission grid is not in place, as its development usually would be far away from where the power is needed. Geothermal is too expensive, not reliable either, for long term use on large scale. So I come full circle back to the “other” The “other” in this case is Wave Energy from the Ocean. Earth is covered with over 75% water, mainly Oceans. There are a lot of advantages. As long as our planet has a Moon, providing gravitational pull on the planets Oceans, and the Sun doesn’t supernova to get so hot as to evaporate the Ocean waters (we would have other problems then), then Ocean Waves will be there. Most of Human Civilization and Urban cities/centers are located on the Coasts, right next to the Ocean, these are the heaviest populated areas, needing the most power anyway, that would not need large or long transmission infrastructure to accompany its development.
www.oceanenergycouncil.com/index.php/Wav...
My knowledge of the Oil/gas industry, and the current political environment supporting renewable energy, combined with my research has led me to believe that there is an on-going shift in THIS country toward the use of cleaner burning NG for our use in the transportation sector, to supplant and eventually replace Oil. We use 20Mbo/d and import over 12Mbo/d , and this HAS to change. Current Elect generation using NG is about 20%, and if this NG is going to shift over to being used more for the transportation sector, then this lost Elect production must be made up, not to mention the increasing pollution and carbon sequestation issues on Coal, that is making it more difficult to grow in this area.

Again, the answer is Ocean Wave energy. This energy is renewable, free, always there, is harnessable day and night, does not take up valuable farmland or land needed for urban civilization, has a low visual impact, and is available on over 75% of the Planet, usually close to large city's, and has high power density that suggests it has the capacity to become the lowest cost renewable energy source. Ill say that again. Capacity to become the LOWEST COST renewable energy source. Do you think this would interest a Utility?

There are several different types of Technologies using Ocean Wave Energy to produce electricity that are both in development or testing and they can basically be broken down into two groups. Wave, and Tidal. I only want to discuss Wave, as I believe the Tidal group Technology is not really applicable for use in large Utility type installations, as the large size needed for such would interfere with Boat traffic navigation in a river or channel, among other issues,and Im looking mainly for Utility scale developmental usage that is applicable all over the globe. There are known wave maps for the various offshore locations throughout the world, that are well known, and any area with an average over 15kw per meter has potential to generate electricity at a price competitive with non-renewable sources. Thus, for Wave technology use there is: Attenuator, Point absorber or Buoy, Overtopper, Oscillating Water Column, Oscillating Wave Surge Converter competing technologies, by multiple manufactures.
To give some examples, Pelamis, Wavestar, are an Attenuator concept, with Pelamis having the world's first commercial wave farm open in 2008 at the Aguçadora wave Park near Póvoa de Varzim in Portugal.
http://www.pelamiswave.com/ http://www.wavestarenergy.com/

AWS, SyncWave, OPPT, Wave Energy Tech, Wave-Bob are Point absorber types:
http://www.awsocean.com/PageProducer.asp... http://www.syncwavesystems.com/
http://www.oceanpowertechnologies.com/ http://www.waveenergytech.com/
http://www.wavebob.com/

For Overtopper type you have WaveEnergy http://waveenergy.no/
Wave Dragon http://www.wavedragon.net/

For Oscillating Water Column: WaveGen http://www.wavegen.co.uk/
Ocean Lynx http://www.oceanlinx.com/
ORECon http://www.orecon.com/

The fifth and last major technology is called Oscillating Wave Surge Converter, and you have:

Wave roller http://www.aw-energy.com/
Carnegie or Ceto ( Cylindrical Energy Transfer Oscillating) http://www.carnegiecorp.com.au/ (ASX: CWE)


Conclusion:

My research suggests there is only ONE company that is USA PUBLIC, that is in development of a commercial, economically viable and do-able, utility-scale renewable wave energy project. That company is OPTT.
http://www.oceanpowertechnologies.com/
or Ocean Power Technologies, Inc, and they have a letter of agreement with Lockheed Martin, “to collaborate in the development of a utility-scale wave power generation project in North America.” This company has been around since 1994, raised $89.9 million from the closing of an United States IPO on April 30, 2007. They have over a decade of ‘in ocean’ experience, proven ‘storm wave’ survivability, formed by Dr. George Taylor, and he's still there, and has over 7% of outstanding shares, making his money aligned with the common shareholder. OPTT uses PowerBuoy technology, and is contributing to a Wave Hub off the coast of St. Ives, Cornwall England, up to 5MW, has others off coast of Oregon, Iberdrola, Spain, and Orkney Islands, Scotland. Japan expressed recent interest. Has multiple contracts with US Navy for Security and Defense power projects, and just received a new one of $2.4M from USN for the power buoy LEAP program. They have 40 issued US patents with 16 US patent applications pending.
Here is the kicker. This company has over $80M in CASH, has only 10.21M outstanding shares, and almost zero debt, meaning they have $8 per share in cash, but its trading at UNDER cash, with a price target of $14, and increasing backorders. They have recent insider buying,  with open market purchases, as of 22Sept09, and low current institutional interest. At the current price, with such a strong balance sheet, increasing customer base, number of patents on their equipment, Lockheed Martin as a developmental partner, and the trend towards incentives for ‘renewable’ clean electricity, getting away from Carbon fuel burning based generation, this is just a “No brainer” to me, and represents a very good entry point for an alternative energy long term play into a possible major producer of a product that could be in demand all over the world. This is a small cap play on renewable Electricity generation, with an extremely strong balance sheet in a growing market. I DO have shares in OPTT, as I have not been able to find any other PUBLIC company, other than Aquafina renewables, but which is a penny stock and had a failed product, that has this kind of exposure to clean renewable ocean energy at this kind of a valuation discount. Disclosure, Long OPTT.
coursonc