Venezuela's Election Means Refiner Profits

Includes: PSX, VLO
by: Richard Evans

This last Sunday, 7 October, Venezuelans re-elected Hugo Chavez for another six-year term as president of the OPEC member country. After defeating the strongest challenge to his 14-year rule, Chavez looks to accelerate his social and economic makeover of Venezuela. This means that several U.S. refiners with facilities along the Gulf Coast look to broaden their profits.


Chavez has established a platform of using oil revenues from its massive oil reserve to finance social spending. Some foreign energy company holdings have been nationalized while others have been bullied to have their production licenses torn up to be replaced by much less profitable service contracts. Venezuela has drastically increased revenues which have gone into spending for free health care, cheap housing for the poor and a raft of social programs.

The problem is that the social programs' cost have outstripped Venezuela's petroleum revenues. The biggest cause has been subsidised products, especially gasoline. Gasoline prices in Venezuela has been frozen since 1998 and citizens pay the world's lowest price for gas, the equivalent of around $0.05 a liter. True, Venezuela is an oil producer, but has limited refining ability. It is forced to sell its crude oil, normally to U.S. refiners, then must buy gasoline and other refined products.

Subsidizing gasoline, as well as a long list of consumer staples such as rice leaves Venezuela facing loads of budget pressures. At the very least, a sharp devaluation of Venezuelan currency should hit almost immediately. But even with the devaluation, Chavez has to keep selling more and more oil to keep ahead of the game. Production has been dropping around much criticism of the state oil company, PDVSA, on charges of lack of maintenance, investment as well as rampant corruption.

This extends to the country's largely state-run refineries, including Venezuela's Amuay refinery, the site of a deadly explosion in August. Lack of maintenance, increasing numbers of stoppages due to "accidents" and general mismanagement means more and more of Venezuela's crude must go outside the country to be refined.

Which leads us to why refiners are happy with President Chavez right now. Refiners as a group are traditionally a poor investment. They require large levels of capital expenditure while the crack spreads, the industry term for the difference from crude "feedstock" to refined products, is normally very thin.

Times have changed and for many refiners crack spreads are rapidly widening. In this article I wrote on how market imbalances are radically expanding crack spreads and turning them into free cash flow machines. One large factor is the availability of Venezuelan crude.

Two refiners that should benefit are Valero (NYSE:VLO) and Phillips 66 (NYSE:PSX).

Valero should have some air under its revenue wings the next 18-24 months as crack spreads along the Gulf Coast broaden. It is also rumored to be in the running to purchase the Texas City refinery from struggling BP (BP), which will broaden its access to cheap Gulf crude. It has a recent share price around $32 and pays around a 1.88% dividend yield.

VLO Chart
(Click to enlarge)

VLO data by YCharts

Phillips, meanwhile has been humming right along. Since its spin-off by Conoco (NYSE:COP) the midstream company is roaring forward with almost no debt while punching out admirable production with utilization at 93% in throughput capacity. Its recent price is around $46 and is paying a dividend yield around 2.13%

PSX Chart
(Click to enlarge)

PSX data by YCharts

Since Phillips has only been trading since 1 May 2012 there is is no truly useful chartable data for earnings. Its current PE is about 24.

Disclosure: I am long PSX, COP. 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.