Western reported that the price difference for the quarter was $23.45/barrel, and because the company buys crude at the WTI price and sells its refined products based on the Brent price, margins shot up. This may seem extortionate, but every major refiner does it for a very simple reason: why charge less for your product if consumers have demonstrated that they are willing to pay more?

Refiner Tesoro Corp. (NYSE: TSO) reported third-quarter EPS last night of $2.39, some $0.41 above the consensus estimate. The largest US refiner, Valero Energy Corp. (NYSE: VLO), posted EPS for the third-quarter of $2.11, well above estimates of $1.80. Marathon Petroleum Corp. (NYSE: MPC) reported EPS for the quarter of $3.16, way above estimates of $2.44. Refining margins also boosted earnings for the major integrated oil giants BP plc (NYSE: BP), Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), and ConocoPhillips Corp. (NYSE: COP).

Murphy Oil Co. (NYSE: MUR) reported EPS of $1.73, excluding discontinued operations, compared with a consensus estimate of $1.18. The company attributed the increase to higher prices for its crude production and higher refining margins. Exploration & production revenue rose about 40%, while refining & marketing revenue rose more than 52%.

The average price of a gallon of gasoline in the US on October 31st was about $3.45, almost $0.65/gallon more than at the same time last year. On the same day, the spot price of a barrel of WTI crude was $93.19 and the spot price of a barrel of Brent crude was $108.43. On the same date one year ago, the WTI crude spot price was $81.45/barrel and the Brent crude spot price was $82.47. A gallon of regular gasoline cost about $2.82 at the end of October 2010.

The current differential between WTI and Brent is $15.24. That amount goes straight to a refiner’s top line, and puts a nice positive gain on the bottom line. Even cheaper varieties of crude, such as the heavier and more sulfurous Saudi crudes, are available and the differentials are even wider though most imported crudes are indexed to the Brent spot price. Still, every barrel that is refined in the US yields products that are priced to consumers as if the crude input were a barrel of Brent.

The Brent spot price is expected to drop as production resumes from Libya. Libya’s light, sweet crude is comparable to Brent, and the International Energy Agency expects Libyan production to grow to 600,000 barrels/day by the end of this year. OPEC has estimated that the country’s former production of about 1.3 million barrels/day could be back on-line by late next year. That will continue to moderate the Brent spot price and the differential to WTI.

The price differential between WTI and Brent is closing, if slowly, and gasoline prices should continue to fall, even if more slowly. That’s good news for US drivers and could be the best holiday gift for the weak US economy.

Paul Ausick

TransCanada stands to lose the most if the project is denied. The entire Keystone pipeline system is nearly fully contracted for a total of 900,000 barrels/day for an average term of 18 years. That is a big loss if the pipeline isn’t built. The largest producer in the oil sands is Syncrude, a joint venture that includes Imperial Oil Resources (wholly owned by Exxon Mobil Corp. (NYSE: XOM)), Suncor Energy Inc. (NYSE: SU), and China Petroleum & Chemical Corp. (NYSE: SNP) — Sinopec — among others. Other producers include ConocoPhillips Corp. (NYSE: COP), Chevron Corp. (NYSE: CVX), Murphy Oil Corp. (NYSE: MUR), Total SA (NYSE: TOT), Royal Dutch Shell plc (NYSE: RDS-A), BP plc. (NYSE: BP), and Devon Energy Corp. (NYSE: DVN).

These companies won’t lose everything because the bitumen from the oil sands will go somewhere, somehow. Unless, of course, the Canadian government decides to shut down every project in Alberta, and that simply will not happen. One of the big problems facing the producers now is that they’re crude is landlocked and sells at a substantial discount to WTI. For the week ending September 23rd, Heavy Hardesty grade crude sold for $78.28/barrel, while WTI sold for $80.29 and Brent sold for $109.17. Getting crude from Alberta to a coast, any coast, is critical for producers.

If the Keystone XL pipeline is killed, an expansion to an existing pipeline system to the US/Canadian west coast could take up some of the slack. Kinder Morgan Energy Partners LP (NYSE: KMP) is investigating an expansion to its Trans Mountain system and Enbridge Inc. (NYSE: ENB) has already begun the permitting process for a similar pipeline to the west.

Another interesting development are proposals from both of Canada’s major railroads to construct a pipeline-by-rail from Alberta to west coast. And while nothing officially like a pipeline-by-rail has been proposed for the run to the US Gulf Coast, rail traffic has already increased substantially from North Dakota south to Cushing and, eventually producers hope, to the Gulf.

In July weekly US rail carloads of petroleum and petroleum products hit a four-year high, and the August total of about 7,400 carloads is even higher. A rail tanker holds about 1,500 barrels, so every day about 1.6 million barrels of petroleum is moving around on the US rail network. Add to that another half a million barrels a day from the oil sands and that puts about another 2,500 tanker cars on the rails every day.

There were 750 reported rail accidents involving hazardous materials in 2010. The odds of a significant oil spill rise if we add more oil transport by rail.

The same is true if the Canadian crude is moved by truck. Truck transportation by surface road is even more expensive and prone to accidents. There were nearly 12,000 road accidents involving hazardous materials in 2010. Besides being much more expensive, more tanker trucks carrying up to 300 barrels of oil each raises again the odds on an environmentally significant spill.

So while pipeline spills are a concern, rail and truck accidents are far more common. The Keystone XL pipeline should be held to a very high safety standard, but it is probably the safest way to move the most Canadian crude.

The argument that Canada should stop development and extraction in the oil sands may make more environmental sense, but until a large-scale alternative transportation fuel is available at a reasonable price, oil sands development will very likely continue. And moving that oil by pipeline is really the only sensible option.

Paul Ausick

Marathon Petroleum was spun out of Marathon Oil Corp. (NYSE: MRO) in late July. Since then, the stock has been quite volatile, but is now back to about where it was at the time of the spin-off. Shares recently traded at $37.41 and its market cap is $12.94 billion. The stock’s 52-week trading range is $29.32 to $47.17.  The current value is trading at a price-to-book ratio of about 1.44 to 1. Its forward price earnings multiple is 4.86. The company currently pays a dividend yield of 2.2% to investors.  Thomson Reuters has a consensus price target of $51.92, implying roughly 39% upside to the most recent price.

Valero has gotten a boost from its entry into the ethanol market and could be a buyer for the two refineries that Sunoco plans to shed by next July. Valero’s shares recently traded at $23.55 and its market cap is $12.75 billion. The stock’s 52-week trading range is $16.43-$30.98.  The current value is trading at a price-to-book ratio of about 0.80 to 1. Its forward price earnings multiple is 5.39. The company currently pays a dividend yield of 0.90% to investors. Thomson Reuters has a consensus price target of $30.06, implying roughly 28% upside to the most recent price.

Murphy Oil, unlike the other refiners, still owns some exploration and production assets that help keep its value up. Murphy’s stock recently traded at $51.98 and its market cap is $10.18 billion. The stock’s 52-week trading range is $47.24-$77.41.  The current value is trading at a price-to-book ratio of about 1.15 to 1. Its forward price earnings multiple is 7.39. The company currently pays a dividend yield of 2.09% to investors. Thomson Reuters has a consensus price target of $75.00, implying roughly 44% upside to the most recent price.

HollyFrontier was formed from a merger of Holly Corp. and Frontier Oil in June of this year. Since then the stock has moved generally upward. HollyFrontier shares recently traded at $37.74 and its market cap is $7.79 billion. The stock’s 52-week trading range is $13.34-$38.90. The current value is trading at a price-to-book ratio of 4.13. Its forward price earnings multiple is 6.12. The company currently pays a dividend of 0.94% to investors. Thomson Reuters has a consensus price target of $41.00, implying roughly 10% to the most recent price.

Sunoco announced yesterday that it would be selling or closing its remaining refining assets. Once that happens, Sunoco will own gas stations and majority positions in two other recent spin-offs in logistics and petroleum coke production. Sunoco’s shares recently traded at $38.79 and its market cap is $4.75 billion. The stock’s 52-week trading range is $27.76-$46.57. The current value is trading at a price-to-book ratio of 1.68. Its forward price earnings multiple is 19.70. The company currently pays a dividend of 1.53% to investors. Thomson Reuters has a consensus price target of $44.20, implying roughly 14% to the most recent price.

Tesoro has announced that it plans to add nearly 300 retail outlets to its existing 1,200. The company expects a 12% boost to its business with these additions. Tesoro shares recently traded at $25.02 and its market cap is $3.46 billion. The stock’s 52-week trading range is $12.03-$28.74.  The current value is trading at a price-to-book ratio of about 0.97 to 1. Its forward price earnings multiple is 6.35. The company currently pays no dividend to investors. Thomson Reuters has a consensus price target of $27.79, implying roughly 11% upside to the most recent price.

Western Refining is the smallest of the seven companies we’ve looked at here. Most of its sales are in low population states in the US southwest. Western’s shares recently traded at $17.95 and its market cap is $1.62 billion. The stock’s 52-week trading range is $4.70-$21.75.  The current value is trading at a price-to-book ratio of about 2.00 to 1. Its forward price earnings multiple is 5.85. The company currently pays no dividend to investors. Thomson Reuters has a consensus price target of $20.63, implying roughly 15% upside to the most recent price.

The substantial upside for Murphy reflects the company’s E&P asset holdings. Owning at least some of the refining feedstock helps Murphy smooth out the higher prices for crude oil and its access to domestic crude rather than imported, more expensive crude also works in its favor. Marathon Petroleum and Valero also have substantial upside, but in their cases they are vulnerable to a closing of the differential between WTI and Brent crudes. Murphy is an overall better choice.

Paul Ausick

Sunoco, Inc. (NYSE: SUN) has decided that now is the time for it, too, to shed its refining operations. The company wants to sell two refineries on the east coast with a combined capacity of 505,000 barrels/day of throughput. Sunoco will take an impairment charge of up to $2.2 billion in its third quarter and has warned that the costs of closing the plants could rise by another $500 million.

That’s if Sunoco can’t find a buyer for the refiners.  If no buyer steps up, Sunoco will close the refineries in July 2012. The company said it could record a pre-tax gain of about $2 billion if it sells or closes the refineries. It’s not an idle exercise to wonder if there are any buyers left.

Here’s a review of recent refining changes. Marathon Oil Corp. (NYSE: MRO) spun off its refining to a new company, Marathon Petroleum Corp. (NYSE: MPC). ConocoPhillips Corp. (NYSE: COP) has announced that it will spin-off its refining operations this year. Valero Corp. (NYSE: VLO) acquired a refinery in the UK from Royal Dutch Shell plc (NYSE: RDS-A) and just last week bought a refinery in Louisiana from Murphy Oil Corp. (NYSE: MUR).

The logical buyer, Valero, has spent about $2.625 billion so far this year on refining acquisitions. The company reported about $4 billion in cash and $6.8 billion in long-term debt in its last quarterly earnings. It could conceivably pony up the money for the Sunoco refineries. Marathon, with a market cap of more than $12 billion, holds about $1.6 billion in cash and long-term debt of about $3.2 billion. No other refiner is a likely prospect.

It looks like Sunoco may have waited too long to put its refineries on the market. The company has another problem as well. According to the company’s most recent 10-K, the east coast refineries get their feedstocks from foreign sources, primarily Nigeria. Just 13% of the company’s feedstocks are domestically sourced.

That means that Sunoco, or a potential buyer, will be paying Brent crude prices, currently about $15/barrel more than US WTI crude. Other US refiners with access to WTI crude are able to turn that $15/barrel differential into profits. The Sunoco refineries can’t do that. That’s not a selling point.

Still, Sunoco’s announcement has boosted the share price by nearly 4% just before noon today, to $37.50, in a 52-week range of $26.93-$46.98.

Paul Ausick

Valero has just spent $625 million to purchase a Louisiana refinery from Murphy Oil Corp. (NYSE: MUR). The price includes $300 million for the crude oil and product currently in storage at the refinery. The plant can process 125,000 barrels/day of crude oil and includes a 34,000 barrel/day hydrocracker that produces high-margin hydrocarbons.

Based just on crude refining capacity, Valero is paying $5,000/barrel of capacity. Last March the company acquired the Chevron Corp. (NYSE: CVX) 210,000 barrel/day refinery in Wales for $2 billion, including inventories, or about $9,500/barrel of capacity. When Holly Corp. merged with Frontier Oil to form HollyFrontier Corp. (NYSE: HFC) earlier this year, Holly paid $2.9 billion for refining capacity of 187,000 barrels/day, or about $15,500/barrel of capacity.

Backing out the cost of the inventory, Valero nabbed the Louisiana refinery for $2,600/barrel and the Welsh refinery for for about $2,400/barrel. Building a new refinery costs about $12,000/barrel, so Valero made out like a bandit on both deals.

Refining is very profitable now due to the spread between Brent and WTI crudes. The spread today is nearly $26/barrel. Refiners on the east coast and on the Gulf coast price their refined products based on the price of Brent crude. That means that any refiner with access to WTI crude receives a $26/barrel discount on feedstock, but gets the same price for the refined product.

This is the reason that gasoline pump prices have fallen just 4% since Memorial Day while Brent prices have fallen by nearly 3 times that in the same time period.

For continued prosperity, Valero is no doubt counting on the discounted price of WTI crude to remain in place for some time to come. And there is plenty of evidence that the price for Brent is replacing the price for WTI as the world’s benchmark. That, too, could spell a smoothing of the volatility in refining.

Both Valero and Murphy are lower in the first 15 minutes of trading this morning. Valero is down more than -3%, at $21.79, in a 52-week range of $16.21-$31.12. Murphy is down more than -4%, at $51.23, in a 52-week range of $47.24-$78.16.

Paul Ausick

Baidu, Inc. (NASDAQ: BIDU) Cut to Hold at S&P Equity Research (late Thursday call).
Bunge Limited (NYSE: BG) Reiterated Buy as Value at Zacks.
Central European Media Enterprises Ltd. (NASDAQ: CETV) Cut to Sell at Goldman Sachs.
Cree Inc. (NASDAQ: CREE) maintained as Hold with $37 target at Canaccord Genuity.
General Mills Inc. (NYSE: GIS) Cut to Hold at Argus.
IAC/InterActiveCorp (NASDAQ: IACI) Cut to Neutral with $41 target at BofA/ML.
Marathon Petroleum Corporation (NYSE: MPC) Started as Outperform with $55 at Credit Suisse.
Murphy Oil Corporation (NYSE: MUR) Raised to Neutral at JPMorgan.
Myriad Genetics Inc. (NASDAQ: MYGN) Raised to Outperform as Bull of the Day at Zacks.
NetApp Inc. (NASDAQ: NTAP) Reiterated Buy with $68 target at Argus.
PetMed Express Inc. (NASDAQ: PETS) Maintained Underperform as Bear of the Day at Zacks.
Schnitzer Steel Industries Inc. (NASDAQ: SCHN) Reiterated Buy with $80 target at Canaccord Genuity.
Targa Resources Corporation (NYSE: TRGP) Started as Neutral with $34 target at CRedit Suisse.
Targa Resources Partners LP (NYSE: NGLS) Started as Outperform with $40 target at Credit Suisse.

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JON C. OGG

(29 APR – 5 MAY) Ticker

Weekly Price Change (%)

Close Price 5May11

Close Price 29Apr11

Market Cap ($Mil)

-14.7

43.47

50.98

6741.8

-13.2

88.71

102.23

10359.9

-11.9

58.43

66.34

6228.4

-11.5

68.57

77.48

13262.3

-11.1

89.78

100.95

9407.8

-11.0

76.52

85.96

25967.7

-10.8

19.33

21.68

4092.9

-10.5

24.27

27.12

3477.3

-10.4

68.70

76.69

29057.2

-10.3

47.64

53.13

6094.8

The upgrades are no doubt the result of higher valuations for the oil companies based on prices and announced reserves. The ink was barely dry, though, before prices took a serious turn southward, raising the question of when the decline would stop.

For the past month, oil prices have been rising steadily in response to fears of supply disruption in North Africa and the Middle East. Brent crude reached about $117/barrel and WTI topped $104/barrel. Fear probably contributed about $10/barrel to that price. The lack of a strong demonstration in Saudi Arabia was probably the single biggest reason for declining fears for supply from the Middle East.

What remains of the fear premium has now been almost wiped out by the events in Japan. Brent crude has fallen below $109/barrel and WTI has fallen below $98/barrel. Deteriorating demand from Japan contributes to the decline, as two refineries are still on fire and three others are shutdown. These five refineries have a combined daily capacity of 1.5 million barrels, nearly a third of the country’s refining capacity.

On top of that, the International Energy Agency has reported in its monthly report for March that crude supplies globally have reached an all-time high. The supply will only grow as refineries head into the spring turnaround and maintenance season. The IEA reported February supply reached an all-time high of 89 million barrels/day.

Libya’s 1.6 million barrel/day output has been effectively shutdown by the fighting between government and rebel forces. But supply from the other members of OPEC, particularly Saudi Arabia, have made up for the loss. Increased production from Alaska and Russia have more than made up the difference.

Demand for crude oil in Japan is not likely to reach pre-quake levels for some time. The extent of the damage to the burning refineries will determine demand recovery. In the meantime, refined products imports will have to increase at least somewhat to pick up the slack. That would include gasoline, diesel fuel, and heating oil.

Japan has lost about 7% of its total electricity generating capacity, and it will have to make this up with coal-, oil-, or natural gas-fired generation. The largest impact will be on the liquefied natural gas (LNG) suppliers, which could be called upon to boost shipments by as much as 1 billion cubic feet/day.

The abundance of crude supply and the capacity for refiners to ship products to Japan without strain probably point to an overall drop in crude prices to around $95/barrel for WTI and $105/barrel for Brent. It does not seem likely that the prices will dive another $5/barrel, but betting on the price of crude even a week in advance is best left to the professionals.

Paul Ausick

Twelve of the thirteen companies or their subsidiaries are publicly traded: Anadarko Petroleum Corp. (NYSE: APC), ATP Oil & Gas Corp. (NASDAQ: ATPG), BHP Billiton plc (NYSE: BHP), Chevron Corp. (NYSE: CVX), Cobalt International Energy, Inc. (NYSE: CIE), ENI SpA (NYSE: E), Hess Corp. (NYSE: HES), Marathon Oil Corp. (NYSE: MRO), Murphy Oil Corp. (NYSE: MUR), Noble Energy Inc. (NYSE: NBL), Royal Dutch Shell plc (NYSE: RDS-A), and Statoil ASA (NYSE: STO).

There are 16 drilling projects covered by the agency’s ruling and drilling could resume within a few weeks. Any resumption would require the driller to comply with requirements issued in December that aim to ensure that drillers have a approved plan for containing the oil in the event of a blowout. It’s not clear that all 16 projects meet that requirement or how long it will take for the requirement to be met.

US crude production will lose about 220,000 barrels/day in 2011 as a result of the Gulf disaster, about 13% of offshore production. For the US economy, that means more imports at higher prices. For the economy of the Gulf coast states, the temporary loss of 8,000-12,000 jobs just goes on and on.

Drillers have been holding idle rigs in the Gulf, waiting for permits to go ahead with their projects. But that can’t continue indefinitely at costs of hundreds of thousands of dollars a day. Smaller companies, like ATP Oil & Gas, can afford to wait even less than the majors like Chevron and Shell. Permits that once took just days to get approved, can now take up to five months.

For its part, the BOEMRE says it has approved some permits for modifications to existing wells, but that the agency’s priority remains safe and environmentally responsible development.

While Gulf production is stalled, the missing 220,000 barrels/day add to the volatility of the crude market. If crude rises above $100/barrel this year, the federal government will take some serious heat for the increase. The heat will turn to flames if gasoline prices rise to $4/gallon.

Paul Ausick

ConocoPhillips (NYSE: COP) Started as Neutral at JPMorgan.
Group 1 Automotive Inc. (NYSE: GPI) Cut to Market Perform at Wells Fargo.
Huntsman Corporation (NYSE: HUN) Raised to Buy at Jefferies.
Interpublic Group (NYSE: IPG) Cut to Hold at Deutsche Bank.
Marathon Oil Corp. (NYSE: MRO) Started as Overweight at JPMorgan.
Murphy Oil Corp. (NYSE: MUR) Started as Underweight at JPMorgan.
Overseas Shipholding Group (NYSE: OSG) Cut to Hold at Cantor Fitzgerald.
Philip Morris International (NYSE: PM) Started as Outperform at Credit Suisse.
PG&E Corp. (NYSE: PCG) Raised to Outperform at Wells Fargo.

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

JON C. OGG