Marathon Petroleum Corporation (NYSE: MPC) will replace RadioShack Corporation (NYSE: RSH) with only a $1.4 billion market cap in the S&P 500 index, RadioShack will replace Harte-Hanks Inc. (NYSE: HHS) in the S&P MidCap 400 index, and Harte-Hanks with a $530 million market capitalization will replace Hutchinson Technology Inc. (NASDAQ: HTCH) in the S&P SmallCap 600 index as it ranked as #600 by market cap in the index.

Marathon Oil Corp. (NYSE: MRO), a current S&P 500 constituent, is spinning off Marathon Petroleum to its shareholders after the market close on June 30; what’s left of Marathon Oil will remain in the S&P 500 index following the spin-off.   S&P SmallCap 600 index and is no longer representative of the small cap market space.

AMC Networks Inc. (NASDAQ: AMCXV) will replace Boyd Gaming Corporation (NYSE: BYD) in the S&P MidCap 400 index; Boyd Gaming will replace StarTek Inc. (NYSE: SRT) in the S&P SmallCap 600 index as StarTek has only a $62 million market cap.  Cablevision Systems Corp. (NYSE: CVC) is spinning off AMC Networks after the market close on June 30 and what remains of Cablevision Systems will remain in the S&P 500 index.

Holly Corp. (NYSE: HOC), a S&P SmallCap 600 constituent, will replace Frontier Oil Corp. (NYSE: FTO) in the S&P MidCap 400 index.  Entropic Communications Inc. (NASDAQ: ENTR) will replace Holly in the S&P SmallCap 600. Holly is acquiring Frontier Oil in a deal expected to be completed on or about June 30 and it will change its name to HollyFrontier Corporation after the merger.

These index changes matter, but the largest gains generally come from the new additions rather than when a company moves up or down in the indexes.  RadioShack is indicated down about 2% and under $13.00; and Entropic is indicated up 3% around $8.55 but no trades have been seen.

As far as the others mentioned in the move, they are ratcheted moves within the various indexes.  The surprise is a simple one by our take: No General Motors Corporation (NYSE: GM) yet in the S&P 500 despite a $45 billion market cap.

JON C. OGG

The next refiner report will be Hess Corp. (NYSE: HES) on April 27th. Hess is expected to post EPS of $1.95 on revenue of $9.45 billion. On May 3rd, Marathon Oil Corp. (NYSE: MRO) reports earnings, and analysts are looking for EPS of $1.41 on revenue of $21.84 billion. On May 4th, Tesoro Corp. (NYSE: TSO) is expected to report EPS of $0.65 on revenue of $5.83 billion. Three more refiners report on May 5th. Frontier Oil Corp. (NYSE: FTO) is expected to post EPS of $0.98 on revenue of $1.75 billion; Western Refining Inc. (NYSE: WNR) is expected to post EPS of$0.29 on revenue of $1.66 billion; and Holly Corp. (NYSE: HOC) is expected to post EPS of $1.38 on revenue of $2.11 billion. Hess, Marathon, and Holly also have crude production operations.

As for Valero, the company reported EPS of $0.30 on revenue of $26.3 billion. In the same period a year ago, Valero reported an EPS loss of -$0.14 on revenue of $18.5 billion. Analysts were expecting EPS of $0.30 on revenue of $22.3 billion.

In early March, Valero lowered its guidance for the first quarter from $0.47 to $0.15-$0.30. The company also said it would take a $0.61/share charge on hedging losses, which it did. Refining throughput margins increased by $3.93 in the first quarter of 2011 compared with the same period a year ago.

It’s not just margins, however, it’s also down to the spread. The difference in cost between WTI crude and Brent crude gives refiners with inland refineries a huge cost break compared with refiners along the US Gulf coast. The lead indicator on crude pricing is now Brent, not WTI.

Gulf coast refineries mostly pay Brent, or what are called waterborne, prices for crude while inland refineries pay WTI prices because there is no pipeline to carry the less expensive WTI from storage in Cushing to the Gulf Coast. Moving WTI crude to the coast by rail or truck is possible at the current spreads, but prices paid by the refiner are closer to Brent than WTI because of the increased transportation cost.

Here’s how Valero states it in their earnings report: “Combined with our heavy and sour crude oil processing capabilities, more than 80 percent of Valero’s refining capacity can process feedstocks that price below waterborne light-sweet crude oils.” And that’s what puts profits on the board for Valero and the others.

The refiners face two issues. First is volatility, where the Brent price could drop to significantly closer to the WTI price. Second, US drivers could stop buying gasoline.

The former is not likely to happen soon, but could be on the horizon for June. Investors have been playing the WTI/Brent spread by going long on Brent and short on WTI then following US economic data to move in and out of the spread bet.

Less driving happens slowly when it happens at all. While there is some evidence that drivers are staying off the road as prices climb to $4/barrel and more, it’s not happening in very great numbers yet.

Valero said that it expects a strong second quarter based mostly on the wide spread between WTI and Brent. The company also expects to boost its capacity utilization.

At market open this morning, Valero shares are down about -1%, to $28.83, within the 52-week range of $15.49-$31.12.

Paul Ausick

Altera Corporation (NASDAQ: ALTR) Raised to Buy at Citigroup.
ArcelorMittal (NYSE: MT) Started as Outperform at RBC.
Archer Daniels Midland Company (NYSE: ADM) Cut to Market Perform at BMO.
Broadcom Corporation (NASDAQ: Maintained Buy at Argus.
Holly Corp. (NYSE: HOC) Raised to Buy at BofA/ML.
Jetblue Airways Corporation (NASDAQ: JBLU) Raised to Buy at Soleil.
Mednax Inc. (NYSE: MD) Raised to Buy at BofA/ML.
Novatel Wireless, Inc. (NASDAQ: NVTL) Maintained Underperform as Bear of the Day at Zacks.
Oracle Corporation (NASDAQ: ORCL) Reiterated Outperform asd #1 Pick at Credit Suisse.
Research in Motion Ltd. (NASDAQ: RIMM) Cut to Neutral at BofA/ML; Maintained Outperform at Credit Suisse.
SAIC Inc. (NYSE: SAI) Cut to Neutral at Credit Suisse.
Superior Industries International, Inc. (NYSE: SUP) Maintained as Outperform and Bull of the Day at Zacks.
United Therapeutics Corporation (NASDAQ: UTHR) Started as Buy at Deutsche Bank.

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

It now appears that Chevron has a deal to sell Pembroke to Valero Energy Corp. (NYSE: VLO) for about $2 billion.  Pembroke can process 210,000 barrels/day of heavy, sour crude — typically available at a substantial discount to the benchmark prices for light, sweet WTI or Brent.

If the Bloomberg report is accurate, and Valero does pay $2 billion for the refinery, the cost to Valero is about $9,500 per barrel of installed capacity. In the recent merger between Holly Corp. (NYSE: HOC) and Frontier Oil Corp. (NYSE: FTO), both much smaller than Valero, Holly is paying about $2.9 billion for Frontier’s 187,000 barrel/day capacity, or about $15,500 per barrel of installed capacity. Both prices include crude inventories on hand.

In another recent international refining deal, India’s Essar Energy agreed to pay $350 million for UK Stanlow refinery on offer from Royal Dutch Shell plc (NYSE: RDS-A). Stanlow’s nameplate capacity is 296,000 barrels/day, so the cost per installed barrel of capacity is just shy of $1,200. But Shell’s crude stocks are not included in the price. Add in an estimated $780 million worth of crude, and the cost per installed barrel climbs to about $3,800.

For comparison, when Valero bought Premcor in 2005, the deal was worth about $8 billion and the cost per barrel of installed capacity was about $9,500, which also included stocks of crude. BP plc (NYSE: BP) has put up for sale two US refineries with a total capacity of about 740,000 barrels/day with an asking price of about $4 billion, or $5,400 per installed barrel of refining capacity.

Without knowing the amount of crude in inventory at Pembroke, it’s hard to figure out exactly what Valero’s paying for the physical plant, but if the Stanlow deal is any guide, the physical plant amounts to about 30% of the total price paid, meaning Valero gets Pembroke for about $2,400 per installed barrel, not including the stocks on hand. It also gets its first European operation and a facility that can handle cheaper crudes. Building a new refinery would cost upwards of $12,000 per installed barrel.

This looks like a good deal for Valero, and it may turn out to be a great deal. Traders are skeptical, pushing the stock down by about -5% in morning trading, to $26.34, within the 52-week trading range of $15.49-$30.42.

Paul Ausick

Pure-play refiners like Valero Energy Corp. (NYSE: VLO), Holly Corp. (NYSE: HOC), Frontier Oil Corp. (NYSE: FTO), and Tesoro Corp. (NYSE: TSO) get hit particularly hard. Integrated oil companies like Marathon Oil Corp. (NYSE: MRO), Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), and ConocoPhillips Corp. (NYSE: COP) are able to offset losses in refining with higher prices for the crude they produce.

Since the beginning of the year, though, refiner’s have been doing very well. The crack spread, that is, the difference between what a refiner pays for crude and what that refiner is able to sell the refined products for, doubled between January 1st and March 1st, to more than $26/barrel. Here’s a chart for the past year from Bloomberg:

US demand for heating oil drove a lot of the gain. The rest came from more miles driven and, to some extent, short covering. Those traders who couldn’t believe that refiners could make a profit as crude prices rose had to keep doubling down. But payback time could be here.

Last week Valero indicated EPS for the first quarter would be in the range of $0.15-$0.30, far below estimates from analysts of $0.47. Valero said it expected an after tax loss of $0.61/share ($348 million) on forward sales. In other words, the company lost its hedging bets, and decided to close out its positions and take the loss in the first quarter.

Valero put up a new 52-week high in February, just as the unrest in Egypt was boiling up. Since then it has lost about 10%, although it has regained most of that loss. The stock owns a trailing P/E ratio of more than 50, but a forward P/E of less than 9. The company’s enterprise value is $20.31 billion.

Holly posted a new 52-week high at about the same time as Valero, and like Valero has seen a similar fluctuation since then. Holly has announced its intention to acquire Frontier in an all-stock deal that will give the combined company an estimated enterprise value of $7 billion. Holly’s trailing P/E ratio is nearly 30, and its forward P/E is just over 11. Frontier’s trailing P/E is about 77, and its forward P/E is 12.51.

Tesoro’s share performance tracks nearly identically with Valero’s and Holly’s. Tesoro’s enterprise value is $4.85 billion, but the company posted a loss last year, so there’s no trailing P/E. Forward P/E is near 11.

The majors — Exxon, Chevron, and Conoco — are looking to sell refining assets in an effort to cut debt and to put capital to work in exploration and production, where the real money is. Holly is getting Frontier at a discount, and Marathon has announced that it will spin-off its refining and marketing operations into a separate publicly traded company.

Refiners and refineries are being valued at their lowest level in more than four years. At the height of the “there’s-not-enough-US-refining-capacity” craze in 2006, refining assets were valued at 80% more than the same assets today.

The soaring crack spreads won’t continue, and as gasoline prices rise, US drivers will stay home more. The low valuations could soon be matched by lower refining margins and lower demand.

Paul Ausick

Note: The Flame Index scans thousands of news sites 24 hours per day and ranks companies getting the most negative press right now. The Flame Index Media Analysis Algorithm crunches the data for an up-to-the-minute ranking of the hardest-hit companies.

The Flame Index started as a research tool in 2008 at the NY Innovation Design Lab (nyidlab). It was used as a general metric to evaluate companies and their risk in the media. Publicly traded Fortune 500 companies are used as a measure to calculate an overall market of negative news and the companies are ranked within that market.

Data and ranking provided by the Flame Index.

In the oilfield services sector, Key Energy Services, Inc. (NYSE:KEG) reported EPS of $0.01 on $332 million in revenue. Analysts’ expectations were for EPS of $0.03 on $362.05 in revenue. The company’s chairman and CEO noted that the decline in onshore drilling and workovers is continuing in April, with a drop in rig hours of 8% compared with March. He also said the company had seen “some early signs of improvement” in the Permian Basin and the Mid-Continent, and he believes that “our core customer base will soon begin to increase maintenance driven investment.”

The recovery in refining margins is the big news for the first quarter. As long as crude oil prices stay in the $50-$60/barrel range, refiners can run at higher margins and make more money even though the market for gasoline is still soft. The end of this May marks the beginning of the summer driving season, and demand should rise for gasoline, moving the margins even higher. Crude inventories can be run down at even better margins because the crude was purchased at lower prices and the refined products will sell at the new, higher prices. It’s a refiner’s dream scenario.

Services companies will still face challenges, given the overall decline in rig counts and capital spending from the E&P companies. Natural gas producers, like Atlas Energy, face really low prices, but the summer cooling season may turn that around some as well.

So far in the pre-market this morning, Key Energy is off more than 7%, at $5.00/share, down $0.39. The company’s 52-week trading range is $2.12-$20.09. Atlas Energy is up about 1%, to $19.94/common unit. It’s trading range for the past 52-weeks is $7.97-$45.40. Finally, Holly is up more than 6%, to $27.45/share. It’s 52-week range is $10.84-$48.61.

Paul Ausick
May 7, 2009

Holly said the addition of the Tulsa refinery will expand its capacity to 216,000 barrels/day, and add a mid-continent market to the company’s existing markets in New Mexico and Utah. Holly expects to fund the acquisition from cash on hand and its $300 million revolving credit facility.

Holly is paying a nearly rock-bottom price for the Tulsa refinery, and the investment the company is making in ultra-low diesel fuel production should pay off in the long run.

Neither Sunoco nor Holly shares have generated any action in pre-market trading. Sunoco shares closed yesterday at $27.77, a modest gain. Holly shares closed with a modest loss yesterday, at $21.10.  In the grand scheme of things this is a small transaction, as Sunoco’s market cap is $3.25 billion and Holly’s market cap is $1.06 billion.

Paul Ausick
April 16, 2009

Where ADM did not do so well was in its corn processing operations. Operating profit in the division was down by $135 million,with biofuel products off nearly 62% and sweeteners and starches down61%. Revenue was $2.24 billion, a rise of about 47%, thoughvolumes were up just 3%. Mark-to-market losses on corn hedgescontributed to higher feedstock costs and higher energy costs alsodampened profits. Investors liked the news as ADM shares are up nearly18% this morning.

VeraSun (NYSE:VSE), a pure-play ethanol company, didn’t have a backstop and the company is now in Chapter 11 and may be a new net-zero for shareholders.

After the market closed yesterday, Anadarko (NYSE:APC) reportedquarterly earnings of $2.165 billion, or $4.62 per share. Anon-cash gain of $2.193 billion on derivatives and other adjustmentsboosted revenues significantly. Discretionary cash flow (non-GAAP) grewfrom $736 million in the same period a year ago to $1.132 billion thisyear.

Anadarko’s realized prices for both crude oil and natural gas were upabout 58% and 92%, respectively. The company’s share price is up morethan 5% in early trading today.

At the other end of the energy pipeline, refiner Holly Corporation(NYSE:HOC), this morning reported EPS of $1.00 on revenue of $1.72billion. Analysts had been expecting EPS of $0.87 and revenues of $1.71billion.

Net income was down more than 14% from the same period a year ago, andEPS was off nearly 6%. Refining margins were up 18% year-over-year, butreduced throughput and higher costs caused the decline in net income.Holly has $225 million in cash, no debt, and a credit facility for$175, none of which is outstanding. But the drop in net income isrolling over the good news. Holly’s share price is off about 1.2% thismorning.

With pure-play ethanol companies watching their margins and shareprices dive, it’s not unreasonable to wonder what could happen ifPacific Ethanol (NASDAQ:PEIX) or Aventine (NYSE:AVR) will followVeraSun down the Chapter 11 path.

ADM hasn’t shown any interest so far in picking up one of these guys,but it might not be a bad idea. Until another gasoline additive (notMTBE) can be found to help keep wintertime air clean, ethanol is stillthe only game in town to meet federal and state mandates for emissions.

For that matter, even a crude refiner like Holly might be interested inan ethanol play. On second thought, that’s not likely at all.

Paul Ausick
November 4, 2008

• Banco Santander (STD) Cut to Sell at UBS.
• Exxon Mobil (XOM) Cut to Neutral at Credit Suisse.
• Holly (HOC) Cut to Neutral at Goldman Sachs.
• Iconix Brand Group (ICON) Cut to Neutral at Piper Jaffray.
• T. Rowe Price (TROW) Cut to Market Perform at Wachovia.
• Valero Energy (VLO) Cut to Neutral at Goldman Sachs.

Jon C. Ogg
November 3, 2008