In its announcement Tesoro pointed out the obvious problem:

The discount of WTI to Brent during the fourth quarter narrowed by $18/bbl, dropping from $26/bbl at the end of September to $8/bbl at the end of December. This market price movement impacts fourth quarter results in two ways. First, by reducing benchmark margins at our refineries that run WTI-priced barrels and, second, by reducing the margin on long-haul foreign crude oil barrels indexed to WTI.

Every independent refiner will get hit by this to some degree and we’ve taken a look at what the impact on each might be.

Valero is expected to post EPS of $0.84 in the fourth quarter. The country’s largest refiner owns 16 refineries with a daily throughput volume of 3 million barrels. It is also one of the world’s largest makers of ethanol. Half the refineries are located along the US Gulf Coast, and in the company’s latest investor presentation, WTI margins had fallen from around $26/barrel to around $15/barrel. The company’s Brent margins have stayed relatively flat, at around $10-$11/barrel. To counteract that somewhat, Valero expects to refine about 75,000 barrels/day from the Eagle Ford shale play in the first quarter of 2012. The company is also planning to expand its distillate production to capture the higher margins available from diesel fuel, especially in Europe. Valero hasn’t said anything yet about its fourth quarter earnings, but the company’s stock is down nearly -4% on Tesoro’s report. If Valero revises its earnings estimate — which is likely — another drop of at least that amount is likely.

Marathon completed its spin-off from parent Marathon Oil Corp. (NYSE: MRO) last June. The company owns six refineries and 51% of the company’s crude supply comes from either the US or Canada. The company’s WTI-Brent differential was nearly $23/barrel in the third quarter of this year compared with less than $3.50/barrel in 2010. No data is available for the fourth quarter, but it’s difficult to see how Marathon can avoid getting caught in the same bind as Tesoro and Valero.

Western Refining owns two refineries with a total throughput of 151,000 barrels/day. The company’s operating margin through the first three quarters of 2011 is around $20/barrel. All of Western’s crude is domestically sourced and priced as WTI. This is a nice advantage when Brent pricing is more than $25/barrel higher, but as the differential narrows, Western has to come up with some other way to make profits. This company could get stung badly on WTI pricing.

CVR Energy owns two refineries with a combined throughput of 185,000 barrels/day. Both are located in the Midwest and about 75% of the feedstock is domestically sourced WTI. CVR gets some portion of its feedstock from the Bakken area, which gives the company an additional break on crude pricing because Bakken crude trades at a small discount to WTI. Rising WTI prices will certainly hurt margins for CVR, but probably not as badly as the narrower differential will hurt other refiners.

One last word about Conoco, which is planning to spin-off its refining operations into a separate company. The spin-off was set to happen by mid-2012, but unless refining margins return to what they were last summer, Conoco might have a hard time convincing investors that they’re getting a good deal from the split.

Paul Ausick

Valero Energy Corp. (NYSE: VLO) shares closed down more than -9% on the day. Marathon Petroleum Corp. (NYSE: MPC) closed down nearly -12%, Tesoro Corp. (NYSE: TSO) closed down nearly -10%, and Western Refining Inc. (NYSE: WNR) was off -13.5%. CVR Energy, Inc. (NYSE: CVI) shares plunged more than -16%.

The major integrated oil companies with refining operations also experienced a down day, with Exxon Mobil Corp. (NYSE: XOM) off about -1%, Conoco down about -3%, Chevron Corp. (NYSE: CVX) down about -2%, and BP plc (NYSE: BP) down about -0.5%.

All this carnage over a 150,000 barrel/day pipeline that currently carries almost no oil from the Gulf Coast to the storage tanks at Cushing, Oklahoma, and will not be reversed until sometime later next year. The US consumes about 9 million barrels/day of crude just for transportation use, so less than 2% of that crude should not have such an outsized effect on refiner stocks.

The Seaway pipeline transaction, the other 50% of which is owned by Enterprise Products Partners L.P. (NYSE: EPD), was merely the trigger. Refiners’ profits have been strong in recent months as those with access to WTI and cheaper crudes have been able to price the refined output based on Brent crude input costs. The differential once reached nearly $28/barrel. The price difference closed to about $11/barrel yesterday and is around $8/barrel this morning.

Brent prices are falling, but not as fast as WTI prices are rising. The reversal of the Seaway pipeline means that landlocked WTI can now get to the Gulf Coast refineries where it will be priced the same as Brent. As the two crude prices converge, refiners will not be able to feast off that differential.

Another factor weighing against the refiners is the start-up of the Bakken Oil Express, a tank-car train running from North Dakota to Louisiana. The first train-load of crude left North Dakota on November 7th with 70,000 barrels, with current rail capacity of 100,000 barrels/day expected to increase to 250,000 barrels/day. Rail transport of crude and refined products has risen by more than 9% in the past year, to about 7,600 tank-cars/week.

The price of Brent is falling because production from Libya has ramped quickly, to reach about 700,000 barrels/day already, more than half its total production before the upheaval of last Spring. Full production of 1.3 million barrels/day could be reached before mid-2012, again keeping downward pressure on Brent pricing.

The final factor pushing WTI prices up is the tentative agreement between TransCanada Corp. (NYSE: TRP) and the state of Nebraska on a new route for the Keystone XL pipeline from Canada to the Gulf Coast. This pipeline could carry up to 1.1 million barrels/day when (if) it is built. Because Canada’s synthetic crude is priced even lower than WTI, getting this pipeline into service is critical to oil sands producers who want to see the differential between synthetic crude and WTI/Brent close if not disappear altogether.

TransCanada has said that it is considering moving ahead with the section of the Keystone XL that runs from Cushing to the Gulf Coast and Enterprise has said that it will scrap plans for a new pipeline from Cushing to the Gulf but now plans to expand the Seaway pipeline to as much as 400,000 barrels/day by 2013. The two pipelines combined could carry nearly 1 million barrels/day from Cushing to the Gulf.

That million barrels represents crude that would not need to be imported by ship to the Gulf, but rather than lowering crude prices, it would raise them. That raises refiners’ input costs and raises the price of gasoline at the pump for consumers.

BP and Royal Dutch Shell plc (NYSE: RDS-A) probably stand to gain the most of any of the integrated oil companies from the new outlets to the Gulf. Shell is a big producer from the oil sands and BP is upgrading its refinery in Indiana to process the heavy Canadian synthetic crude, as well as owning production properties in the US midwest.

Refiners’ stocks are likely to take more losses today, though not as bad as the beating they got yesterday. Big oil companies could lose a bit more today, but the rising price for crude more than offsets any hits to their refining operations.

Paul Ausick

Career Education Corporation (NASDAQ: CECO) Reiterated Buy at Argus.
Check Point Software Technologies Ltd. (NASDAQ: CHKP) Reiterated Hold at Argus.
China Mobile Limited (NYSE: CHL) Cut to Neutral at Credit Suisse.
Cisco Systems, Inc. (NASDAQ: CSCO) Cut to Hold with $19 target at Auriga.
CVR Energy, Inc. (NYSE: CVI) Started as Outperform at Credit Suisse.
Dell Inc. (NASDAQ: DELL) Cut to Hold at S&P Equity Research (late Thursday call).
Fifth Third Bancorp (NASDAQ: FITB) Raised to Outperform at Baird.
Genworth Financial (NYSE: GNW) noted as Underperform as Bear of the Day at Zacks.
Google Inc. (NASDAQ: GOOG) Cut to Hold at Citigroup; Maintained Buy at Gabelli; Maintained Outperform but cut target to $700 at Credit Suisse.
Harley-Davidson, Inc. (NYSE: HOG) Raised to Neutral at Goldman Sachs.
HCA Holdings, inc. (NYSE: HCA) Started as Buy at Gleacher & Co.
Melco Crown Entertainment Ltd. (NASDAQ: MPEL) Raised to Buy at BofA/ML.
Newmont Mining Corporation (NYSE: NEM) maintained Neutral but raised target to $70 at BofA/ML.
Priceline.com Incorporated (NASDAQ: PCLN) noted as Outperform as Bull of the Day at Zacks.
Toyota Motor Corporation (NYSE: TM) Started as Equal-weight at Barclays.
Urban Outfitters Inc. (NASDAQ: URBN) Cut to Underperform at Jefferies. 

You can join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

But back in June, CVR killed its plan to spin off its fertilizerbusiness as a master limited partnership. In August, stockholderskilled a plan to offer an additional 10 million shares in a secondaryoffering. Yesterday, CVR withdrew plans for a $125 million offering ofconvertible senior notes.

Operating income from CVR’s petroleum refining business was $20.2million in the quarter, compared with $46.5 million from the fertilizerbusiness. The company sees refining as a drag on its overallprofitability, but it can’t seem to find a way to get rid of it.

The company has only around $60 million in cash on hand, even thoughcash flow from operations in third quarter reached $81.5 million. Thatwas enough to cover $42.2 million of investments and financing, but thecompany can’t keep spending at that rate unless it can borrow orincrease its cash flow. Either case may be difficult going forward.

Regardless, shares are treating this as a win.  Volume is thin but the stock is up 20% at $6.00 pre-market.

Paul Ausick
November 6, 2008

• Cameco (NYSE: CCJ) continued uranium weakness after its Cigar Lake troubles persist… and persist… and persist…
• CVR Energy (NYSE: CVI)… energy and fertilizer, recent IPO, so long for the fun times; becoming one of the worse performing post-IPO’s over the last year.

• Edison International (NYSE: EIX)… becoming habitual to see power generation companies
• McDermott (NYSE: MDR) after naming new CEO; stock back above lows but hit new 52-week lows this morning.
• Silver Standard Resources Inc. (NASDAQ: SSRI), one of the many speculative metals plays on the list
• Horsehead Holdings (NASDAQ: ZINC), again… it’s hard not to give this one at least two nicknames.

Jon C. Ogg
August 15, 2008

• AU Optronics Corp. (NYSE: AUO) stock rose over prior lows but still looking weak after continued weakness.
• CVR Energy, Inc. (NYSE: CVI) yet again.
• eDiets.com (NASDAQ: DIET) preliminary earnings showing economics win over the need to lose weight and live healthy.
• Entropic Communications (NASDAQ: ENTR) downgraded at Piper Jaffray a week ahead of earnings.
• Fresh Del Monte Produce Inc. (NYSE: FDP) down 14% after earnings miss.
• Global Industries Ltd. (NASDAQ: GLBL)…….. offshore oil & gas on lows?
• O2Micro International Ltd. (NASDAQ: OIIM) down another 8%; now down over 2/3 from highs.
• PC Connection Inc. (NASDAQ: PCCC) profit fell 12% and sees revenue flat in Q3; direct PC/IT marketing must not work for all.
• Sony Corp. (NYSE: SNE) dismal earnings got them to 52-week lows.
• Tennant Co. (NYSE: TNC) profit drop, weak guidance.. wow, even in cleaning solutions get weak.
• Trident Microsystems Inc. (NASDAQ: TRID) disappointing earnings and at least 2 downgrades; shares down 26% late; now down 80% from highs.
• Zoran Corp. (NASDAQ: ZRAN) weak outlook and five downgrades… chips are used in DVD players, home theater systems and other electronics, cited economic weakness and a slowdown in consumer spending. Go figure.

The market may have risen huge today, but that doesn’t mean there aren’t many losers when the economy is still in the tank.

Jon C. Ogg
July 29, 2008

• Aegon (NYSE: AEG)
• Advanced Micro Devices (NYSE: AMD)
• Brookdale Senior Living (NYSE: BKD)
• Chartered Semiconductor (NASDAQ: CHRT)
• Chipotle Mexicann Grill (NYSE: CMG)
• CVR Energy (NYSE: CVI)
• Gehl Company (NASDAQ: GEHL)
• 51Job inc.. (NASDAQ: JOBS)
• Lam Research (NASDAQ: LRCX)
• Lattice Semiconductor (NASDAQ: LSCC)
• McClatchy (NYSE: MNI)
• Micron Tech (NYSE: MU)
• Mine Safety Appliances (NYSE: MSA)
• New Frontier (NASDAQ: NOOF)
• Ryland Group (NYSE: RYL)
• THQ Inc. (NASDAQ: THQI)
• Virgin Media Inc. (NASDAQ: VMED)
• William Sonoma (NYSE: WSM)

Jon C. Ogg
July 28, 2008

Proposed MLP IPO’s are not the only ones that have either been withdrawn or are still pending. Forum Oilfield Technologies filed for an IPO in October 2007, but withdrew the filing on the same day that Plains pulled its proposed IPO. Forum cited "market conditions" as its reason from withdrawing.

Entergy (NYSE:ETR) announced a plan to spin-off its nuclear generating facilities in November 2007. Entergy has announced names and logos for the new company, Enexus Energy Corp, and for the nuclear operating company that Entergy and Enexus will create, EquaGen L.L.C. This one is still likely to happen, despite the silly names.

CVR Energy Inc. (NYSE:CVI) announced plans in February to spin off an MLP to own and operate its nitrogen fertilizer plant and other projects. CVR Energy reports first quarter earnings after market close today.   We also covered this one much more in-depth in our Special Situation newsletter.  The company told us in a telephone call that the spin-off IPO is still pending, but that was also before the company warned on results.

The failure, or slow pace, of IPOs even affected the hot renewable market. Renewable Energy Group filed for an IPO in July 2007, and withdrew its offering in March.

Oil is north of $120.00 per barrel.  Energy IPOs, whether for MLPs or not, are having a tough time.  A logic class would surmise that investors don’t want to catch the top-tick in what may be an unproven entity after a monumental run.

You can join our open email distribution list to hear about other IPO’s, secondaries, financings, spin-offs, and mergers.

Paul Ausick
May 19, 2008

CVR partners is a limited partnership formed by CVR Energy, Inc. to own and operate a nitrogen fertilizer facility and develop a diversified portfolio of assets that are complementary to its business and CVR Energy’s refining business.  Its nitrogen fertilizer business produces ammonia and urea ammonia nitrate fertilizers.

This is a spin-off of CVR Energy, Inc. (NYSE: CVI), which it is reliant upon for management and for many key areas of operation.  Upon the closing of this offering, CVR Energy will indirectly own approximately 87% of the outstanding units.

The company generated net sales and operating income of $173.5 million and $71.0 million for 2005, $170.0 million and $43 million for 2006, and $187.4 million and $48 million for 2007.

Jon C. Ogg
February 28, 2008