Fill'er Up At Wawa

Includes: ETP, HES, MUR, VLO
by: Robert Friedenberg

The exit of the refining business by the integrated oil companies, the importation of refined products and the marketing of gasoline by Wawa-type convenience store chains and the competition from the big-box retail companies like Costco (NASDAQ:COST) and Wal-Mart (NYSE:WMT) who will sell it to attract customers will provide opportunities and nightmares for investors.

The integrated oil companies are spinning off their downstream operations to their shareholders because their capitalization is based almost 100% on their proved reserves and not on the value of refineries, service stations and petro-chemical plants.

ConocoPhillips (NYSE:COP) has spun off its entire downstream business to become a non-integrated major sans refining capability while Marathon Oil Corporation (NYSE:MRO) has spun off its six refineries and their Speedway convenience store chain to Marathon Petroleum Company (NYSE:MPC) to benefit its shareholders.

I believe that in the next ten years, ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX) and BP plc. (NYSE:BP) will follow and and spin off their downstream to enrich their shareholders and that Murphy Oil Corporation (NYSE:MUR) offers a short-term opportunity because it announced that it is looking to sell its refineries to concentrate on exploration and production.

Sunoco (NYSE:ETP) and Hess (NYSE:HES) have exited the refining business and are supplying thousands of their gas stations and fuel oil customers with imported fuels that have been refined overseas. Sunoco is importing gasoline from Borco's expanded storage terminal in the Bahamas, which has storage capacity of 30 million barrels, or 25% of the world's daily oil demand. Hess has converted its St. Croix refinery into a storage depot for imported fuels, which will supply its stations and fuel oil customers.

Prior to Borco's expansion, it stored and shipped crude oil to our Eastern refineries for processing into gasoline and other fuels, but now it is storing and selling refined products from overseas refineries, which could result in the collapse of our East Coast refineries and is changing the way gasoline is being marketed there.

Wawa, a convenience store chain similar to 7-Eleven, is rapidly becoming one of the leading gasoline marketers along the East Coast now that the price of gasoline has trumped filling up at Sunoco, ExxonMobil, Hess, Chevron, Shell, (NYSE:RDS.A) and other well-known stations at a time when oil companies are selling their refineries or spinning off their downstream operations.

The convenience store chains and the big-box retail companies like Costco and Wal-Mart are expanding their gasoline sales to attract customers much the way they do with $4 generic drugs and 99 cent coffee. Their gasoline business is part of their advertising budget and not a separate profit center, and will present serious problems for Sunoco, Hess and Valero (NYSE:VLO) to compete.

The United States is the largest gasoline market in the world and I believe that there are foreign national oil companies discussing strategies to enter it either through refinery acquisitions or in a partnership with a company like Sunoco that has thousands of gas stations they can supply with own crude oil or refined products.

Petrobras (NYSE:PBR), a Brazilian oil company, owns a Texas refinery and Lukoil (OTCPK:LUKFY), one of the largest Russian oil companies, which bought more than 1,000 U.S. filling stations from Getty Petroleum Marketing Inc., might want a refinery where they can process their crude oil.

There are investment opportunities for the shareholders of the integrated oil companies if they follow the trend set by Conoco and Marathon and unlock the value for their shareholders by spinning off their downstream, or in Sunoco that has pieces that don't fit because a merger.

Sunoco, now Energy Transfer Partners after a merger, has left it with 4000 Sunoco service stations that don't fit into its future as one of the largest natural gas, crude oil and refined products pipeline transportation and storage companies, but should be very attractive to a foreign company that wants an establish an East Coast market to import its gasoline. The sale or a partnership will unlock a great deal of value for ETP's shareholders.

Valero Energy (VLO) and other refining companies with gas stations to supply will have nightmares because they will be competing with imported gasoline that's being refined and in many cases sold by foreign companies that have access to much cheaper crude oil than a Valero and will be competing with the Wawa-type convenience store chains and the big-box guys at the pump.

Disclosure: I am long XOM, CVX, MRO, BP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.