24/7 Wall St. » MPC

Crude Oil Refiners Poised for Continued Profit Margins

Paul Ausick — Mon, 10 Jun 2013 18:05:00 +0000

When U.S. crude oil supplies remain very high, U.S. drivers can usually depend on gasoline pump prices to fall. That has not been happening in the U.S. for about 2 months now, with gasoline prices averaging around $3.54 a gallon in mid-April, but rising to nearly $3.65 at the end of the first week in June.

Global crude oil production currently exceeds global consumption. Not only that, the U.S. Energy Information Administration today released a new estimate of total global shale oil and gas resources that increased the number of barrels of oil available from shale deposits from a 2011 estimate of 32 billion barrels to a new total of 345 billion barrels, slightly more than 10% of total global resources. As other countries begin to adopt the horizontal drilling and fracking techniques now common in the U.S., global production will rise even further,

Lack of demand from Europe due to its economic woes and demand for imports to the U.S. have trimmed the price differential between Brent crude and WTI crude to below $10 a barrel. And while higher demand from Asia is likely to soak up new production, that demand increase is likely to be offset by the drop in European and U.S. demand.

The question is when crude prices will begin to drop, and the answer is not immediately clear. The IntercontinentalExchange Inc. (NYSE: ICE) reported in its Commitment of Traders report for the week ending June 4th, that long managed money positions in Brent crude futures and options now outnumber shorts by more than five to one. Among commercial traders, short positions outnumber longs by nearly two to one. So, producers and processors expect crude prices to fall, while speculators are betting on a rise.

One possible reason for this has been posed by energy economist Philip Verleger, who writes in his latest weekly newsletter that until the U.S. Federal Reserve’s quantitative easing program ends, U.S. crude inventories will remain high because returns to storage are better than putting cash in a bank, where it earns virtually nothing. At some point, though, U.S. inventories will have to fall if for no other reason than inventories cannot continue to grow forever.

Once the process of emptying out crude storage tanks begins, gasoline prices will begin to fall again. Until then, refining should continue to enjoy significant per barrel margins and are very likely to continue as the best performing segment of the energy sector. The poorest performing refiner over the past 12 months has been HollyFrontier Corp. (NYSE: HFC) and it’s up almost 50%. The best performer has been Tesoro Corp. (NYSE: TSO), up about 160%, followed by Marathon Petroleum Corp. (NYSE: MPC), up more than 120%, and Phillips 66 (NYSE: PSX), up more than 100%. Most are off their 52-week highs, but forward multiples for all these stocks remain between 8 and 9, indicating that they may still have some room to run.

Filed under: Energy (Business) Tagged: HFC, ICE, MPC, PSX, TSO

Value Investors Have Many Stocks to Buy in the Energy Sector

Paul Ausick — Thu, 23 May 2013 12:40:08 +0000

Last year was a good year for oil and gas stocks, but unless a company had a refining and marketing operation, it was not a great year. Share prices rose by at least 80% for pure-play refiners, while the integrated companies stayed mired in the single-digit realm. Services companies posted share price gains in the teens, and natural gas producers had a really tough year. Value stocks in the energy sector are sometimes hard to identify because the large companies cannot grow much and the small ones are often quite risky.

So far in 2013, refiners have managed to keep the profits rolling in, but those profits are getting slimmer as the spread between West Texas Intermediate (WTI) and Brent grades of crude oil narrows. The producers feel the pinch from lower realized prices per barrel, the services firms feel the pinch as fewer wells are drilled and the refiners no longer benefit as much.

Natural gas producers have begun to see an improvement in pricing, from around $3.20 per thousand cubic feet at the beginning of the year to more than $4.00 last week. That is a boost of 25%, and some analysts think that price could double by the end of this year.

Here is our latest take on some of the major players in the oil and gas sector.

Integrated Major Oil and Gas Companies, Plus One

Exxon Mobil Corp. (NYSE: XOM) closed at $92.21 last night and has a market value of about $410 billion. The consensus target price from Thomson Reuters is around $94.30, and the 52-week range is $77.13 to $93.67. Exxon has a dividend yield of 2.7%. The implied upside to the consensus target is a scant 2.3%, and note that the target price is above the 52-week high.

Chevron Corp. (NYSE: CVX) closed at $124.93 last night and has a market value of about $242.2 billion. The consensus target price is around $129.50, and the 52-week range is $95.73 to $126.98, a new high set yesterday. Chevron has a dividend yield of 3.2%. The implied upside to the consensus target is just 3.66%, and the target price is above the 52-week high.

BP PLC (NYSE: BP) closed at $43.30 last night and has a market value of about $138.2 billion. The consensus target price is around $51.40, and the 52-week range is $36.25 to $45.45. BP’s dividend yield is about 5%. The implied upside to the consensus target is 18.7%, and note that BP’s target price also is above the 52-week high.

Continental Resources Inc. (NYSE: CLR) closed at $84.44 last night and has a market value of about $15.5 billion. The consensus price target is around $101.70, and the 52-week range is $61.02 to $93.99. Continental pays no dividend. The implied upside to the consensus target is above 20%, and the target price is well above the 52-week high.

We thought it might be instructive to toss Continental Resources into the mix because it is the largest producer in the Bakken oil shale play. As a valuation play, it offers an upside that is stronger than even BP’s, without the drag that BP still gets from any remaining liability for the April 2010 Gulf of Mexico disaster. The downside for Continental is high expectations — the company is expected to grow revenues by nearly 50% in 2013. The major upside is the narrowing gap between WTI and Brent crude varieties and added rail transportation out of the Bakken.

Forced to choose between BP and Continental, we would go with Continental, even absent a dividend. Share price growth potential is more likely than at BP, and the share price only has to rise by a little more than $2.00 to make up for the forgone dividend. Share price appreciation at BP is much more problematic.

Natural Gas Producers

Chesapeake Energy Corp. (NYSE: CHK) closed at $21.10 yesterday and has a market value of about $14.1 billion. The consensus target price is $22.45, and the 52-week range is $14.45 to $22.97. Chesapeake’s dividend yield is 1.7%. The implied upside to the consensus target is about 6.4%, and the target price is only slightly below the 52-week high.

EOG Resources Inc. (NYSE: EOG) closed last night at $130.93 and has a market value of about $35.6 billion. The consensus price target is about $155.25. The 52-week range is $82.48 to $139.00. EOG has a dividend yield of 0.6%. The implied upside to the consensus target is 18.5%, and the target price is well above the 52-week high.

These two companies rank second and third behind Exxon in natural gas production. Higher natural gas prices in 2013 represent the view of virtually every energy expert in the country. On valuation alone, EOG holds the inside track among these producers. It simply takes too much growth for Exxon to move the needle, and even though Chesapeake has a new chief executive officer with a solid background in operations, he will not join the company until next month and is likely to have only a limited impact on this quarter’s performance.

Oil Field Services

Schlumberger Ltd. (NYSE: SLB) closed last night at $75.58 and has a market value of about $100 billion. The consensus price target from Thomson Reuters is $90.50, and the 52-week range is $59.12 to $82.00. Schlumberger has a dividend yield of 1.7%. The implied upside to the consensus target is about 19.7%, and the price target is well above the 52-week high.

Halliburton Co. (NYSE: HAL) closed at $44.02 last night and has a market value of about $41 billion. The consensus target price is $51.00, and the 52-week range is $26.28 to $45.75. Halliburton’s dividend yield is 1.1%. The implied upside to the consensus target is 15.9%. Again the target price is well above the 52-week high.

Baker Hughes Inc. (NYSE: BHI) ended yesterday at $47.40 and has a market value of about $21.2 billion. The consensus target price is $50.65, and the 52-week range is $37.08 to $50.97. Baker Hughes has a dividend yield of 1.3%. The implied upside to the consensus target is about 6.9%, and the target price is above the 52-week high.

National Oilwell Varco Inc. (NYSE: NOV) closed last night at $69.17 and has a market value of about $30 billion. The consensus target price is $82.65, and the 52-week range is $59.07 to $89.95. National has a dividend yield of 0.8%. The implied upside to the consensus target is 19.5%, and the price target is below the 52-week high.

Transocean Ltd. (NYSE: RIG) closed at $52.31 last night and has a market value of about $19 billion. The consensus price target is $61.00 and the 52-week range is $39.32 to $59.50. Transocean does not pay a dividend (it will pay a special, one-time dividend of $2.24 a share in four equal quarterly installments beginning in June). The implied upside to the consensus target is 16.6%, and again the price target is above the 52-week high.

Ensco PLC (NYSE: ESV) closed last night at $62.35 and has a market value of about $14.8 billion. The consensus target price is around $68.00, and the 52-week range is $41.63 to $65.82. Ensco has a dividend yield of 3.2%. The implied upside to the consensus target is about 9%, and again the price target is above the 52-week high.

Of the services firms, Schlumberger and Transocean currently trade lower today than they did when we last surveyed these companies in February. Ensco trades essentially flat. The rest have posted share price gains that have cut implied gains significantly. National Oilwell Varco remains the choice here, partly because its price target is considerably below its 52-week high. The shares have plenty of room to run.

Refiners

Valero Energy Corp. (NYSE: VLO) closed last night at $40.53 and has a market value of about $22.1 billion. The consensus target price from Thomson Reuters is $47.90, and the 52-week range is $18.28 to $44.76. Valero has a dividend yield of 1.9%. The implied upside to the consensus target is 18.2%, and the price target is above the 52-week high.

Phillips 66 (NYSE: PSX) closed at $65.39 last night, and it has a market value of about $40.5 billion. The consensus price target is $72.15, and the 52-week range is $29.25 to $70.52. Phillips 66 has a dividend yield of 1.9%. The implied upside to the consensus target is 10.3%, and again the price target is above the 52-week high.

Marathon Petroleum Corp. (NYSE: MPC) ended yesterday at $82.45 and has a market value of about $26.8 billion. The consensus price target is $95.27, and the 52-week range is $33.65 to $92.73. Marathon’s dividend yield is about 1.7%. The implied upside to the consensus target is about 15.5%, and again the price target is above the 52-week high.

Refiners are beginning to feel the pinch as prices for WTI crude narrow the spread to Brent crude. In February that spread was $21 a barrel, and these refiners were able to source their feedstocks from the much cheaper U.S. barrels. The spread has now narrowed to around $8 a barrel, shaving away the bulk of the refiners’ profitability.

Phillips 66’s margin at its mid-continent refineries in the first quarter was $27.29 a barrel, and its worldwide margin came in at $13.94 a barrel, higher than either Valero or Marathon. Phillips 66 stands to be the last of the big refiners to lose any margin to the closing spread between WTI and Brent.

Some Observations

Production was lower at all the major integrated companies last quarter, and given the slowing demand and high inventory levels, there is no reason to expect a big spurt in production this year. Prices for crude will continue on their general downward trend, forcing these firms to make hard choices about new projects.

Prices for gasoline will have to fall because U.S. gasoline inventories are rising as new cars are more fuel-efficient and drivers simply drive less. Unless federal law is changed to permit crude oil exports beyond Canada and Mexico, increased U.S. production will find its way to U.S. refineries. Refined products exports could grow, and with them, refining revenues and profits.

If there are any profits to be had in the second quarter, they are once again likely to depend on refining. Services companies’ margins are being squeezed because of price competition and falling crude prices are limiting margins for the producers.

Natural gas producers should see an upturn in prices during the summer cooling season, and most analysts expect that to carry on right through the rest of this year. Gas prices around $8 per thousand cubic feet are certainly possible.

Filed under: Energy (Business) Tagged: BHI, BP, CHK, CLR, CVX, EOG, ESV, HAL, MPC, NOV, PSX, RIG, SLB, VLO, XOM

24/7 Wall St. Closing Bell — Tuesday: Markets Mixed at Open, Closes Slightly Higher

Paul Ausick — Tue, 30 Apr 2013 20:06:01 +0000

U.S. equity markets opened mixed this morning as investors weighed conflicting data from the U.S., Europe, and Asia. In Europe, retail sales declined more than expected in Germany, Italy’s unemployment rate remained unchanged at 11.5%, and eurozone inflation moderated to 1.2%, below a forecast for inflation of 1.6%. In Asia, Japanese industrial production rose less than expected, retail unexpectedly fell, and unemployment came in below expectations. In the U.S., the S&P Case-Shiller housing price index rose more than expected (more coverage here), while the Chicago PMI came in well below expectations and chilled investors for a spell this morning (more coverage here). The latest U.S. consumer confidence index came in higher than expected, which put some heat back into the morning trading session (more coverage here).

The U.S. dollar index is trading down 0.47% today, now at 81.762. The GSCI commodity index is up 1.2% at 629.99. WTI crude oil closed down 1.1%, at $93.46 a barrel, down 3.9% for the month of April. Brent crude trades down 1.6% at $102.19 a barrel. Natural gas is down 0.4% today at about $4.15 per million BTUs. Gold settled up 0.3% today at $1,472.10 an ounce, but lost 7.8% for the month, the largest drop in 16 months.

The unofficial closing bells put the DJIA up more than 20 points to 14,839.18 (0.14%), the NASDAQ rose nearly 22 points (0.66%) to 3,328.79, and the S&P 500 rose 0.24% or nearly 4 points to 1,597.45.

There were a several analyst upgrades and downgrades today, including Pandora Media Inc. (NYSE: P) initiated as ‘sector perform’ at RBC Capital Markets; Buffalo Wild Wings Inc. (NASDAQ: BWLD) cut to ‘hold’ at KeyBanc; Best Buy Co. Inc. (NYSE: BBY) raised to ‘buy’ at Deutsche Bank (more coverage here); PulteGroup Inc. (NYSE: PHM) cut to ‘neutral’ at J.P. Morgan; and SINA Corp. (NASDAQ: SINA) raised to ‘buy’ at Jefferies.

Earnings reports since markets closed last night resulted in some price moves today, including these as of the last half hour of trading: Embraer SA (NYSE: ERJ) is up 6.7% at $34.94; Express Scripts Holding Co. (NASDAQ: ESRX) is up 1.6% at $59.38; General Growth Properties Inc. (NYSE: GGP) is up 2.2% at $22.50 after posting a new 52-week high of $22.80 earlier today; Herbalife Ltd. (NYSE: HLF) is up 2.7% at $39.78 (more coverage here); Hertz Global Holdings Inc. (NYSE: HTZ) is up 0.2% at $24.03 after posting a new 52-week high of $24.79 earlier today; Newmont Mining Corp. (NYSE: NEM) is down 5% at $32.27 after posting a new 52-week low of $31.33 earlier today; Riverbed Technology Inc. (NASDAQ: RVBD) is up fractionally at $14.86; 3D Systems Corp. (NYSE: DDD) is up 7.3% at $38.39; Aetna Inc. (NYSE: AET) is up 2.5% at $57.55 after posting a new 52-week high of $58.63 earlier today; Anheuser-Busch InBev SA (NYSE: BUD) is up 0.3% at $95.72; Avon Products Inc. (NYSE: AVP) is up 4.5% at $23.23 after posting a new 52-week high of $24.30 earlier today; BP plc (NYSE: BP) is up 2.3% at $43.61 (more coverage here); Harvest Natural Resources Inc. (NYSE: HNR) is down 5.5% at $3.25; Marathon Petroleum Corp. (NYSE: MPC) is down 4.9% at $78.39; Office Depot Inc. (NYSE: ODP) is up 4.9% at $3.88; United States Steel Corp. (NYSE: X) is up 0.3% at $17.59; and Valero Energy Corp. (NYSE: VLO) is down 2.5% at $40.17 (more coverage here).

Before markets open tomorrow morning we are scheduled to hear earnings reports from Affymetrix Inc. (NASDAQ: AFFX), Bankrate Inc. (NYSE: RATE), Leap Wireless International Inc. (NASDAQ: LEAP), Spectrum Brands Holdings Inc. (NYSE: SPB), Trulia Inc. (NASDAQ: TRLA), Vanguard Health Systems Inc. (NYSE: VHS), ADT Corp. (NYSE: ADT), Chesapeake Energy Corp. (NYSE: CHK), Comcast Corp. (NASDAQ: CMCSA), Humana Inc. (NYSE: HUM), James River Coal Co. (NASDAQ: JRCC), Mastercard Inc. (NYSE: MA), and Viacom Corp. (NASDAQ: VIAB).

Some standouts among heavily traded stocks today include:

Sirius XM Radio Inc. (NASDAQ: SIRI) is up 5.5% at $3.24 after posting a new 52-week high of $3.25 earlier today. The satellite radio company posted good numbers and made permanent the hire of interim CEO James Meyer.

Delcath Systems Inc. (NASDAQ: DCTH) is down 39.8% at $0.84. The pharmaceutical and medical device maker will have to repeat a clinical trial.

Pitney Bowes Inc. (NYSE: PBI) is down 16.6% at $13.52. The business equipment company had a 57% drop in profits and cut its dividend.

Stay tuned for Wednesday. The Federal Open Market Committee (FOMC) concludes a two-day meeting. We have also noted the following events on the schedule (all times Eastern):

7:00 a.m. – Mortgage Bankers Association purchase applications
8:15 a.m. – ADP employment report
8:58 a.m. – PMI manufacturing index
10:00 a.m. – ISM manufacturing index
10:00 a.m. – Construction spending
10:30 a.m. – EIA weekly petroleum status report
2:00 p.m. – FOMC meeting announcement

Filed under: Investing Tagged: ADT, AET, AFFX, AVP, BBY, BP, BUD, BWLD, CHK, CMCSA, DCTH, DDD, ESRX, GGP, HLF, HNR, HTZ, HUM, JRCC, LEAP, MA, MPC, NEM, ODP, P, PBI, PHM, RATE, RVBD, SINA, SIRI, SPB, TRLA, VHS, VIA-B, VLO, X

Valero, Marathon Earnings Continue to Impress

Paul Ausick — Tue, 30 Apr 2013 12:30:12 +0000

Oil refiners Marathon Petroleum Corp. (NYSE: MPC) and Valero Energy Corp. (NYSE: VLO) reported first-quarter 2013 results before markets opened this morning.

Marathon posted diluted earnings per share (EPS) of $2.17 on revenues of $23.35 billion. In the same period a year ago, the company reported EPS of $1.71 on revenues of $20.28 billion. First-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $2.16 and $19.8 billion in revenues.

Marathon’s refinery throughput rose from 1.32 million barrels a day in the first quarter of 2012 to 1.67 million barrels. Sales volume also rose, from 1.53 million barrels a day to 1.88 million barrels. Gross margins fell, however, from $8.36 a barrel last year to $7.92 a barrel. Total income rose $200 million year-over-year, from $956 million to $1.16 billion.

Valero posted EPS of $1.18 on revenues of $33.47 billion, compared with an EPS loss of $0.78 on revenues of $35.17 billion in 2011. The first-quarter 2012 results include a charge of $1.09 per share related to the closure of the company’s Aruba refinery. The consensus estimate called for EPS of $0.98 on revenues of $30.41 billion.

Like Marathon, Valero’s refinery throughput rose. Unlike Marathon, Valero’s gross margins also rose. Refining margins rose from $7.71 a barrel in the year-ago quarter to $10.59 this year. Total input volume rose by about 11,000 barrels a day year-over-year and total yield rose by 16,000 barrels a day.

Valero’s CEO said:

Despite a heavy turnaround and maintenance workload, our refineries had good performance that was aided by wider diesel margins and crude oil discounts plus contribution from our new hydrocracker at the Port Arthur refinery.

Valero also noted that it has restarted the three ethanol plants it had idled in the first quarter and that all 10 of the company’s ethanol plants were operating at near capacity. Ethanol income for the quarter totaled $14 million.

Valero has nearly completed the spin-off of its retail operations, which the company expects to bring to a conclusion on May 1. Valero will distribute 80% of the stock in the new company, called CST Brands Inc., to current shareholders and will dump the remaining 20% within 18 months. CST Brands will begin regular trading on the NYSE under the ticker symbol CST on May 2.

Marathon’s shares are trading up about 0.8% at $83.05 in the premarket this morning. The stock’s 52-week range is $33.65 to $92.73. Thomson Reuters had a consensus price target of around $95.00 before today’s results were announced.

Valero’s shares are up about 3.5%, at $42.65 in a 52-week range of $20.00 to $39.04. Thomson Reuters had a consensus analyst price target of around $51.20 before today’s report.

Filed under: Energy (Business) Tagged: MPC, VLO

24/7 Wall St. Closing Bell — Monday: Markets Open Higher, S&P Closes on New High

Paul Ausick — Mon, 29 Apr 2013 20:07:42 +0000

U.S. equity markets opened higher this morning after the U.S. Department of Commerce reported that personal income and spending both rose by 0.2%, which was slightly higher than expected for spending and slightly lower than expectations for income (more coverage here). We also noted the sharp drop in spending on energy and the impact that could have on oil and gasoline prices for the rest of this year (more coverage here). In Europe, new data was limited to Italian business confidence (down), Spanish retail sales (also down, but not as much as expected), and eurozone business and consumer survey (more coverage here). Italian government borrowing costs posted a two-year low (more coverage here). In Asia, both Japanese and Chinese markets were closed for a holiday. U.S. pending home sales rose in March, reversing a drop in February sales (more coverage here).

The U.S. dollar index is trading down 0.42% today, now at 82.159. The GSCI commodity index is down 0.5% at 622.29. WTI crude oil closed up 1.6%, at $94.50 a barrel. Brent crude trades up 0.5% at $103.72 a barrel. Natural gas is up 4% today at about $4.39 per million BTUs. Gold settled up 1% today at $1,467.40 an ounce.

The unofficial closing bells put the DJIA up more than 106 points to 14,818.83 (0.72%), the NASDAQ rose nearly 28 points (0.85%) to 3,307.02, and the S&P 500 rose 0.72% or more than 11 points to 1,593.59, a new high.

There were a several analyst upgrades and downgrades today, including Walt Disney Co. (NYSE: DIS) raised to ‘buy’ at UBS; Petroleo Brasileiro SA (NYSE: PBR), aka Petrobras, raised to ‘buy’ at BofA/Merrill Lynch; Union Pacific Co. (NYSE: UNP) cut to ‘hold’ at TD Securities; Gold Fields Inc. (NYSE: GFI) cut to ‘neutral’ at HSBC; and Abercrombie & Fitch Co. (NYSE: ANF) raised to ‘outperform’ at Macquarie.

Earnings reports since markets closed last Friday resulted in some price moves today, including these as of the last half hour of trading: Eaton Corp. (NYSE: ETN) is up 3.6% at $60.76; Loews Corp. (NYSE: L) is up 0.4% at $44.63 (more coverage here); Senior Housing Properties Trust (NYSE: SNH) is down 1.4% at $28.18; and Sohu.com Inc. (NASDAQ: SOHU) is down 0.2% at $50.66.

Before markets open tomorrow morning we are scheduled to hear earnings reports from Embraer SA (NYSE: ERJ), Express Scripts Holding Co. (NASDAQ: ESRX), General Growth Properties Inc. (NYSE: GGP), Herbalife Ltd. (NYSE: HLF), Hertz Global Holdings Inc. (NYSE: HTZ), Newmont Mining Corp. (NYSE: NEM), Riverbed Technology Inc. (NASDAQ: RVBD), 3D Systems Corp. (NYSE: DDD), Aetna Inc. (NYSE: AET), Anheuser-Busch InBev SA (NYSE: BUD), Avon Products Inc. (NYSE: AVP), BP plc (NYSE: BP), Harvest Natural Resources Inc. (NYSE: HNR), Marathon Petroleum Corp. (NYSE: MPC), Office Depot Inc. (NYSE: ODP), Sirius XM Radio Inc. (NASDAQ: SIRI), United States Steel Corp. (NYSE: X), and Valero Energy Corp. (NYSE: VLO).

Some standouts among heavily traded stocks today include:

Petroleo Brasileiro SA (NYSE: PBR) is up 6.6% at $19.23. Petrobras, as it’s known, reported lousy earnings, but it forecast growth going forward, added to a possible restart of drilling by Chevron Corp. (NYSE: CVX) in the Frade field following a year of inactivity due to a spill.

Conceptus Inc. (NASDAQ: CPTS) is up 19.5% at $30.95. The medical device maker is being acquired by Germany’s Bayer AG $1.1 billion.

Zynga Inc. (NASDAQ: ZNGA) is down 3.6% at $3.23. The social games maker had no news today, but is giving back some of Friday’s gains, which followed losses earlier last week on a weak earnings report.

Stay tuned for Tuesday. The Federal Open Market Committee (FOMC) begins a two-day meeting. We have also noted the following events on the schedule (all times Eastern):

8:30 a.m. – Employment cost index
9:00 a.m. – S&P Case-Shiller house price index
9:45 a.m. – Chicago purchasing manager’s index
10:00 a.m. – Conference Board consumer confidence index
11:30 a.m. – 4- and 52-week bill auctions
3:00 p.m. – Farm prices

Filed under: Investing Tagged: AET, ANF, AVP, BP, BUD, CPTS, CVX, DDD, DIS, ERJ, ESRX, ETN, GFI, GGP, HLF, HNR, HTZ, L, MPC, NEM, ODP, PBR, RVBD, SIRI, SNH, SOHU, UNP, VLO, X, ZNGA

Oppenheimer Calls Sell-Off in Refiners a Buying Opportunity (HFC, HEP, MPC, PSX, COP, TSO, VLO)

Lee Jackson — Fri, 12 Apr 2013 12:00:26 +0000

After Leading the S&P 500 and the energy sector for the past two years, and into the first quarter of this year, the U.S. refining sector hit a rough patch in March. A narrowing of spreads between West Texas Intermediate (WTI) and Brent crude, and some good old-fashioned profit taking, seem to be the main culprits for the sell-off in these stocks. A new report out from Oppenheimer stresses that U.S. refiners are the only group in the energy sector with more than 10% average free cash flow yield, based on 2013 and 2014 consensus estimates, which should enable them to grow dividends and buy back stock.

In their report, the energy team at Oppenheimer point to four specific reasons that may allow the refining stocks to recover from the recent sell-off, and continue their market leadership.

The continued wide differential between WTI and Brent pricing: Analysts also expect new heavy oil refining capacity expansions to reduce WTI demand and depress its price relative to Brent, leading to wider discounts.
Continued cheap natural gas: Even with a pullback in oil prices and a surge in natural gas prices, they expect the gas-oil discount to remain significantly above historical levels.
Growing diesel and gasoline imports: For the first time last year, the United States became a net exporter of gasoline and diesel, and given U.S. refiners’ cost advantages and higher export margins, this trend is expected to grow materially in the next few years.
Declining environmental spending: While environmental spending is expected to continue, its share of capital expenditures (CAPEX) has steadily declined as most of the key milestones of the Clean Air Act legislation have been achieved. CAPEX as a percentage of cash flow is the lowest for the refiners in decades.

Here are the five U.S. refining stocks that investors may want to buy now.

HollyFrontier Corp. (NYSE: HFC) leads off the Oppenheimer list. It has the highest unit profit per barrel of refining capacity in the industry, and a 39% interest in Holly Energy Partners. L.P. (NYSE: HEP). The stock trades at under six times earnings. The Thomson/First Call estimate is at $60.50. HollyFrontier also pays shareholders a 2.50% dividend.

Marathon Petroleum Corp. (NYSE: MPC) is one of the largest petroleum product refiners, marketers and transporters in the United States. The Wall St. consensus price target for the stock is $93.50. Investors receive a 1.70% dividend.

Phillips 66 (NYSE: PSX) makes the stocks to buy list. Spun off from former parent company ConocoPhillips (NYSE: COP), Phillips 66 has 15 refineries with a net crude oil capacity of 2.2 millions barrels per day, 10,000 branded marketing outlets and 15,000 miles of pipeline systems. The consensus price target is $69. Shareholders receive a 1.90% dividend.

Tesoro Corp. (NYSE: TSO) was another popular name caught up in the refining stock sell-off. Its retail-marketing system includes more than 1,375 branded service stations, of which more than 590 are company operated under the Tesoro, Shell and USA Gasoline brands. The consensus price target for the stock is $59. Investors receive a 1.50% dividend.

Valero Energy Corp. (NYSE: VLO) made Jim Cramer’s lightning round this week as a stock to buy. The company is expected to receive $1.05 billion in cash and incur a $260 million tax liability as a result of the separation of is retail segment next month. The new company, CST Brands (CST on the NYSE) will have 1,032 sites in the U.S., 81% owned, and 61% in Texas, with attractive demographics for convenience stores. Valero is also the world’s largest independent refining company. The consensus price target for the stock is $48.50. Investors are paid a 1.90% dividend.

With all of these market leading refining stocks trading at least 10% below their 52-week highs, now may be the time for investors to add them to their portfolios. Growing earnings and dividends is usually a positive combination in any industry, and refining is no exception.

Filed under: Energy (Business) Tagged: COP, HEP, HFC, MPC, PSX, TSO, VLO

Outlook Remains Rosy for Refiners (TSO, MPC, PSX, ALJ, WNR, CVI, VLO, DK, HFC, HES)

Paul Ausick — Thu, 21 Feb 2013 13:00:32 +0000

Share prices appreciated by at least 80% for most major crude oil refiners in 2012, a far better performance than turned in by the integrated oil companies, the oil services firms and, saints preserve us, natural gas producers.

Tesoro Corp. (NYSE: TSO), Marathon Petroleum Corp. (NYSE: MPC), Phillips 66 (NYSE: PSX), Alon USA Energy Inc. (NYSE: ALJ), Western Refining Inc. (NYSE: WNR), CVR Energy Inc. (NYSE: CVI) and Valero Corp. (NYSE: VLO) have all experienced share price gains of around 80% or higher in the past 12 months.

Delek US Holdings Inc. (NYSE: DK) Delek shares are up 175%. The laggard is HollyFrontier Corp. (NYSE: HFC), up just 62% in the past 12 months.

Each of these companies has figured out a way to take advantage of the wide difference between West Texas Intermediate (WTI) crude and Brent crude, which this morning sits at around $20 a barrel. Refining the cheaper WTI and selling the resulting fuel at the same price as if it were refined from Brent crude makes all the difference. How long can this last?

At least another year, maybe longer, for a couple of simple reasons. First, the mid-American pricing point at Cushing, Okla., is full to the brim and there is still relatively little pipeline transportation out of Cushing to the Gulf Coast, the center of U.S. refining. New pipelines, even if approved, will not be in service until later this year, at the earliest.

The second reason is not so simple, but worth noting. And like real estate, it is all about location, location, location. The heavily populated states along the Atlantic coast are driving the price of U.S. gasoline. The cost basis for East Coast gasoline is Brent, regardless of what kind of crude is actually used. In most cases, the crude is Brent because there is no easy way to get crude from North Dakota or Canada to the East Coast.

The refinery closures in the east have contributed to a short supply of gasoline, and the difference is being made up by gasoline imports from Europe. Again, based on the price of Brent crude with the added expense of transportation across the Atlantic. European refiners then are bidding up the spot price for Brent in order to acquire crude to refine and send the products off to New York.

East Coast gasoline inventories are low, which results in higher prices for immediate deliveries than for future deliveries, a commodity market condition known as backwardation. Any rumor or news or indication only magnifies the backwardation effect, even if only temporarily.

The AAA Daily Fuel Gauge this morning indicates that the average price of gasoline today is $3.778 a gallon, about $0.15 higher than a week ago. Gasoline supplies on the East Coast are expected to be tight this summer, especially given the recent closure of the Hess Corp. (NYSE: HES) refinery in New Jersey. Until inventories increase on the East Coast, all refiners, whether in Europe or the United States, are very likely to continue making handsome profits and the share prices are likely to continue rising.

Filed under: Energy (Business) Tagged: ALJ, CVI, DK, HES, HFC, MPC, PSX, TSO, VLO, WNR

The Best Value in Energy Stocks for the Rest of 2013 (XOM, CVX, BP, CHK, EOG, SLB, HAL, BHI, NOV, RIG, ESV, VLO, PSX, MPC)

Paul Ausick — Fri, 08 Feb 2013 14:50:24 +0000

In the energy sector, 2012 was the year of the refiner. Stock prices appreciated at least 80% for most of them, while the supermajor integrated companies were only able to tally gains in the single digits. Services firms managed to eke out share price gains in the teens over the past 12 months. Of the natural gas producers, the less said the better.

Here is a look at some of the major stocks in each sector and what could be in store for them in 2013.

Integrated Oil and Gas Companies

Exxon Mobil Corp. (NYSE: XOM) trades near $87.95 and has a market value of about $395.32 billion. The consensus target price from Thomson Reuters is $94.10, and the 52-week range is $77.13 to $93.67. Exxon has a dividend yield of 2.5%. The implied upside to the consensus target is 7%, and note that the target price is slightly above the 52-week high.

Chevron Corp. (NYSE: CVX) trades near $114.83 and has a market value of about $224.41 billion. The consensus target price is $123.90, and the 52-week range is $95.73 to $118.53. Chevron has a dividend yield of 3.1%. The implied upside to the consensus target is 8%, and again the target price is above the 52-week high.

BP PLC (NYSE: BP) trades near $43.19 and has a market value of about $137.1 billion. The consensus target price is $51.25, and the 52-week range is $36.25 to $48.34. BP has a dividend yield of 4.9%. The implied upside to the consensus target is 19%, and again the target price is above the 52-week high.

As a value play, only BP looks like a possibility. The problem of course is the remaining liability the company faces for the April 2010 Gulf of Mexico explosion that killed 11 workers and spilled 5 million barrels of crude into the Gulf waters. Production at the majors was at best flat last year and they are expecting better this year. If that happens, these companies may perform better this year, but only if the spread between Brent crude and WTI continues to narrow, and to close on the higher Brent price.

Natural Gas Producers

Chesapeake Energy Corp. (NYSE: CHK) trades near $20.37 and has a market value of about $13.13 billion. The consensus target price is $22.90, and the 52-week range is $13.32 to $26.09. Chesapeake has a dividend yield of 1.7%. The implied upside to the consensus target is 12%, and again the target price is above the 52-week high.

EOG Resources Inc. (NYSE: EOG) trades near $129.78 and has a market value of about $35.11 billion. The consensus target price from Thomson Reuters is $137.05, and the 52-week range is $82.48 to $129.92. EOG has a dividend yield of 0.5%. The implied upside to the consensus target is 6%, and again the target price is above the 52-week high.

EOG’s shares rose 19% last year, while Chesapeake’s lost more than 9%. The market for natural gas remains oversupplied, continuing to put pressure on prices. That pressure will not dissipate much this year.

Oil Field Services

Schlumberger Ltd. (NYSE: SLB) trades near $78.15 and has a market value of about $103.72 billion. The consensus target price is $90.80, and the 52-week range is $59.12 to $80.78. Schlumberger has a dividend yield of 1.6%. The implied upside to the consensus target is 16%, and again the target price is well above the 52-week high.

Halliburton Co. (NYSE: HAL) trades near $40.53 and has a market value of about $37.6 billion. The consensus target price is $47.40, and the 52-week range is $26.28 to $41.25. Halliburton has a dividend yield of 0.9%. The implied upside to the consensus target is 17%, and the target price is above the 52-week high.

Baker Hughes Inc. (NYSE: BHI) trades near $44.92 and has a market value of about $19.74 billion. The consensus target price is $48.90, and the 52-week range is $37.08 to $52.93. Baker Hughes has a dividend yield of 1.3%. The implied upside to the consensus target is 9%, and again the target price is above the 52-week high.

National Oilwell Varco Inc. (NYSE: NOV) trades near $68.22 and has a market value of about $29.1 billion. The consensus target price is $85.10, and the 52-week range is $59.07 to $89.95. National has a dividend yield of 0.8%. The implied upside to the consensus target is 25%, and again the target price is well above the 52-week high.

Transocean Ltd. (NYSE: RIG) trades near $56.44 and has a market value of about $20.25 billion. The consensus target price is $61.60, and the 52-week range is $39.32 to $59.03. Transocean does not pay a dividend. The implied upside to the consensus target is 9%, and the target price is above the 52-week high.

Ensco PLC (NYSE: ESV) trades near $63.05 and has a market value of about $14.6 billion. The consensus target price is $68.40, and the 52-week range is $41.63 to $65.19. Ensco has a dividend yield of 2.3%. The implied upside to the consensus target is 8%, and the target price is above the 52-week high.

Services firms tied closely to North America had a tough time in 2012 as cutbacks in natural gas drilling hit them hard. The one standout here, National Oilwell Varco, makes and sells components and products for drillers, among other things. The stock price actually dropped by more than 15% last year, but proposed drilling increases — particularly offshore — make this company a reasonable value play, not a value trap.

Refining Companies

Valero Energy Corp. (NYSE: VLO) trades near $45.61 and has a market value of about $25.22 billion. The consensus target price is $47.10 and the 52-week range is $20.00 to $46.09. Valero has a dividend yield of 1.8%. The implied upside to the consensus target is 3%, and the target price is above the 52-week high.

Phillips 66 (NYSE: PSX) trades near $62.20 and has a market value of about $38.97 billion. The consensus target price is $66.40, and the 52-week range is $28.75 to $63.25. Phillips 66 has a dividend yield of 1.6%. The implied upside to the consensus target is 7%, and the target price is above the 52-week high.

Marathon Petroleum Corp. (NYSE: MPC) trades near $78.46 and has a market value of about $26.57 billion. The consensus target price is $80.25, and the 52-week range is $33.65 to $78.37. Marathon has a dividend yield of 1.8%. The implied upside to the consensus target is 2%, and the target price is above the 52-week high.

A spread of $20 or more between the price of Brent and the price of WTI will keep refiners in nice profits. The spread is about $21 a barrel this morning, but has fallen to near $15 a barrel recently. Also watch for price targets to be raised.

Filed under: Energy (Business) Tagged: BHI, BP, CHK, CVX, EOG, ESV, HAL, MPC, NOV, PSX, RIG, SLB, VLO, XOM

Refiners Riding Valero’s Coattails

Paul Ausick — Tue, 29 Jan 2013 19:05:33 +0000

BP, Texas City refineryWhen oil refiner Valero Energy Corp. (NYSE: VLO) reported a big earnings beat this morning, it was almost inevitable that the halo would also appear above the other major refining stocks. And so it has, with competitor Tesoro Corp. (NYSE: TSO) even setting a new 52-week high of its own today. Phillips 66 (NYSE: PSX) is up more than 5%, as are HollyFrontier Corp. (NYSE: HFC), Western Refining Inc. (NYSE: WNR), and Marathon Petroleum Corp. (NYSE: MPC). And all these have already posted new 52-week highs as well.

Valero was the first to report earnings, so the best may be yet to come here. Here’s a look at what’s ahead.

Marathon Petroleum reports tomorrow and fourth-quarter EPS is forecast at $2.10 on revenues of $19.07 billion. The EPS estimate is up $0.46 in the past three months and the consensus price target on the shares is around $76.20. Shares are trading today at about $72.

Phillips 66 also reports tomorrow and fourth-quarter EPS is forecast at $1.68 on revenues of $46.03 billion. The estimate has risen by $0.10 in the past 90 days and the consensus price target on the stock is around $64.40. Shares are trading today at about $60.

Tesoro reports earnings on February 6th and EPS is estimated at $1.37 on revenues of $6.95 billion. The estimate has risen $0.15 a share in the past three months and the consensus price target is around $54.20. Shares are trading today at about $49.

HollyFrontier is scheduled to report on February 26th and the consensus estimate calls for EPS of $2.26 on revenues of $4.93 billion. The earnings estimate has grown by a whopping $0.74 in the past 90 days and the consensus price target on the stock is around $53.30. Shares are trading today at about $50.55.

Western Refining is scheduled to report earnings on February 28th and the consensus estimate calls for EPS of $1.37 on revenues of $$2.31 billion. The earnings estimate is up $0.30 in the past three months and the consensus price target is $34. Shares are trading today at nearly $32.

There are no big value plays here, but keep an eye on the price differential between WTI and Brent crudes, which has dropped below $16 a barrel. Most of these refiners benefit from a lower WTI price and a wider spread. But there’s still room for all of them to keep profits rolling in.

Filed under: Energy (Business) Tagged: HFC, MPC, PSX, TSO, VLO, WNR

Seaway Pipeline Open for Business

Paul Ausick — Fri, 11 Jan 2013 16:43:21 +0000

Crude oil transportation on the Seaway pipeline resumed today at the pipeline’s full capacity of 400,000 barrels a day now available to shippers wanting to move crude from the storage point at Cushing, Oklahoma, to the Gulf Coast. Seaway is a 50-50 joint venture between Enterprise Products Partners LP (NYSE: EPD) and Enbridge Inc. (NYSE: ENB).

The Seaway pipeline originally transported crude from the Gulf Coast to Cushing, but the production increases in the U.S. mid-continent created demand for the less expensive domestic crude at Gulf Coast refineries and the pipeline’s owners reversed the flow. Most U.S. crude trades at a price differential of more than $20 a barrel to the Brent crude imports to the Gulf Coast.

Refiners able to get their hands on the cheaper domestic crude are able to post better margins. Gulf Coast refiners have been locked into higher priced Brent and Louisiana Light Sweet crudes, while inland refiners have been able to source the cheaper crude. This has worked to the benefit of Marathon Petroleum Corp. (NYSE: MPC), HollyFrontier Corp. (NYSE: HFC) and Tesoro Corp. (NYSE: TSO) and to the detriment of Valero Energy Corp. (NYSE: VLO), which has many of its refineries located along the Gulf Coast.

Refiners stocks have posted substantial gains over the past 12 months, with Marathon up more than 88%, Tesoro up nearly 81%, and HollyFrontier up nearly 68%. Even Valero is up nearly 70%, with Phillips 66 (NYSE: PSX) the laggard with a share price gain of “just” 55% since its IPO last spring.

Filed under: Energy (Business) Tagged: ENB, EPD, HFC, MPC, PSX, TSO, VLO