For refiners with significant production capacity in the middle part of the US, the price differential has made a major contribution to earnings. HollyFrontier Corp. (NYSE: HFC) this morning reported EPS that fell short of the consensus estimate, but at $1.16 were still well above the $0.79 EPS reported in the first quarter of 2011. Western Refining Inc. (NYSE: WNR) reported better-than-expected earnings last week, but Valero Energy Corp. (NYSE: VLO), Tesoro Corp. (NYSE: TSO), and Marathon Petroleum Corp. (NYSE: MPC) all came up short. ConocoPhillips has finally completed its spin-off of its refining assets into Phillips 66 (NYSE: PSX), and Sunoco Inc. (NYSE: SUN) is going to get out of the refining business one way or another by summer.

What matters for refiners is the cost of Brent. For those with operations along the Gulf and East Coasts, crude inputs come primarily from barrels priced at or near Brent prices. For mid-continent refiners like HollyFrontier and Tesoro, as the Brent-WTI differential closes, profits are very hard to come by.

If the price of WTI falls faster than the price of Brent, as has been happening, mid-continent refiners benefit. If Brent falls faster, the coastal refiners get more of the benefit because their input costs drop. As new or reversed pipelines become available to move WTI from the Cushing, Oklahoma, hub, Brent prices should drop further, adding to the benefit for coastal refineries.

No matter how one looks at it though, refining crude oil is not likely to produce big profits again any time soon, unless the US economy should jump its GDP growth above 3%. A slow, wobbly march in that direction won’t do much.

Shares in HollyFrontier are down about -1.6% in the first half-hour of trading this morning, at $29.05 in a 52-week range of $21.13-$38.90.

Paul Ausick

Delta will pay $150 million for the refinery and expects to spend another $100 million to boost the plant’s capacity to make jet fuel, which is the reason Delta bought the refinery in the first place. The deal follows yesterday’s $5.3 billion acquisition by Energy Transfer Partners L.P. (NYSE: ETP) of downstream company Sunoco Inc. (NYSE: SUN).

A couple of interesting questions follow Delta’s entry into the refining business. First, will other airlines follow? United Continental Holdings Inc. (NYSE: UAL), US Airways Group Inc. (NYSE: LCC), and Southwest Airlines Co. (NYSE: LUV), like other large carriers, follow a hedging strategy that tries to even out the ups-and-downs of crude prices. When it works, as it did for Southwest in 2006 and 2007, management looks like geniuses and the airlines makes a ton of profit. When it doesn’t work, as it didn’t for Southwest a few years later, the less said the better.

The only reason to buy a refinery is to mitigate price risk on crude oil. Delta claims the cost of the refinery is equivalent to the price it would pay for one widebody jet. The company expects to save twice that much annually on fuel costs going forward. Before United and the other carriers jump into the refining business they will want to see if Delta can actually realize its projected savings.

Which brings us to the second question: how does Delta expect to mitigate crude oil price risk? When the possible refinery acquisition first became known, there were reports that JPMorgan Chase & Co. (NYSE: JPM) would take on the crude oil trading that would be needed to supply the refinery. As announced today:

[Delta subsidiary] Monroe is partnering with leading energy companies to supply crude oil and receive jet fuel in exchange for Trainer’s non-jet fuel outputs. Under a three-year agreement, BP will supply the crude oil to be refined at the facility. Monroe Energy will exchange gasoline and other refined products from Trainer for jet fuel from Phillips 66 and BP elsewhere in the country through multi-year agreements.

The “leading energy companies” are ConocoPhillips and BP plc (NYSE: BP). If BP is supplying the crude, the price will be set at or very near Brent crude prices. Jet fuel is generally more expensive than gasoline and other refined products. As Brent prices rise, jet fuel prices will also rise and probably rise faster than gasoline or diesel prices. Thus, Monroe/Delta will be trading lower-priced products for a higher-priced product. No savings there.

The only way for Delta to make sure it saves money is to source its crude more cheaply. In the US, that means getting crude from North Dakota’s Bakken field to the East Coast. There’s no pipeline (yet) to do that. Surely the lack of cheap crude is why JPMorgan is no longer in the picture. The proposed sale of Sunoco’s 335,000-barrel/day Philadelphia refinery to The Carlyle Group will not be concluded if the private equity firm cannot find a source of cheaper crude.

Delta apparently believes that by sourcing crude from BP the airlines has insulated itself from crude price risk. Not having seen details of the contract it’s hard to say. But oil companies are not charitable organizations and BP won’t have made any big concession on price.

Shares of Delta are up about 2.2% in the pre-market at $11.20 in a 52-week range of $6.21-$11.60. A new annual high is certainly within reach today.

Paul Ausick

The unofficial closing bells put the DJIA down nearly 15 points to 13,213.63 (-0.11%), the NASDAQ fell nearly 23 points (-0.74%) to 3,046.36, and the S&P 500 fell -0.39% or more than 5 points to 1,397.91.

There were several analyst upgrades and downgrades today, including Demand Media Inc. (NYSE: DMD) cut to ‘equal weight’ at Evercore; TransCanada Corp. (NYSE: TRP) cut to ‘hold’ at Desjardins; American Railcar Industries Inc. (NASDAQ: ARII) raised to ‘neutral’ at UBS; Chesapeake Energy Corp. (NYSE: CHK) raised to ‘outperform’ at BMO Capital; Kraft Foods Inc. (NYSE: KFT) raised to ‘overweight’ at JPMorgan; Dollar General Corp. (NYSE: DG) raised to ‘strong buy’ at Raymond James; and Kaiser Aluminum Corp. (NASDAQ: KALU) raised to ‘buy’ at Dahlman Rose.

Earnings reports since markets closed last Friday have led to some price changes as of the last half hour of trading today: LDK Solar Co. Ltd. (NYSE: LDK) is up 10.8% at $3.28 (our coverage here); Humana Inc. (NYSE: HUM) is down -8.4% at $80.49; Senior Housing Properties Trust (NYSE: SNH) is up 0.32% at $22.09; and Sohu.com Inc. (NASDAQ: SOHU) is down -7.4% at $51.62.

Tomorrow we get earnings from Arch Coal Inc. (NYSE: ACI), Archer Daniels Midland Co. (NYSE: ADM), Bankrate Inc. (NASDAQ: RATE), Broadcom Corp. (NASDAQ: BRCM), Chesapeake Energy Corp., Domino’s Pizza Inc. (NYSE: DPZ); Office Depot Inc. (NYSE: ODP); Pfizer Inc. (NYSE: PFE); Sirius XM Radio Inc. (NASDAQ: SIRI); and Valero Energy Corp. (NYSE: VLO).

Other standouts from today include the following stocks:

Barnes & Noble Inc. (NYSE: BKS) is up about 54% at $21.07 after posting a new 52-week high of $26.00 earlier today. The company has created a joint venture with Microsoft Corp. (NASDAQ: MSFT). More coverage here.

Sunoco Inc. (NYSE: SUN) is up 19.5% at $48.89 after posting a new 52-week high of $49.50 earlier today. The company is merging with Energy Transfer Partners L.P. in a deal worth about $5.3 billion. More coverage here.

VeriFone Systems Inc. (NYSE: PAY) is down -12.7% at $47.52. The company’s stock was downgraded at Deutsche Bank, along with comments that the company was inflating its organic growth estimates.

Stay tuned for Tuesday. Richmond Fed President Jeffrey Lacker, Minneapolis Fed President Naryana Kocherlakota, San Francisco Fed President John Williams, and Philadelphia Fed President Charles Plosser are all giving speeches. Motor vehicle sales are expected to be reported throughout the day. We have noted the following events on the schedule (all times Eastern):

• 10:00 a.m. – Institute for Supply Management manufacturing index
• 10:00 a.m. – Construction spending
• 11:30 a.m. – 4- and 52-week bill auctions

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Sunoco shareholders will receive payment equal to $25 in cash and 0.5245 ETP common units for each share of Sunoco stock they own. Sunoco shareholders can choose to take $50 in cash, 1.0490 ETP common units, or the cash-common unit split, although the aggregate cash paid will be capped at 50%.

ETP also receives the general partner interest, incentive distribution rights, and 32.4% Sunoco interest in Sunoco Logistics Partners (NYSE: SXL).The owner of ETP’s general partner, Energy Transfer Equity L.P. (NYSE: ETE) will forego its right to about $210 million in incentive distributions from ETP over the next 12 quarters as part of the deal. After the deal closes Sunoco and Sunoco Logistics Partners “will operate under the Energy Transfer Equity, L.P. umbrella of companies.”

One thing that ETP won’t get is Sunoco’s refining business:

[U]nder the merger agreement, Sunoco will continue its plans for exiting its refining business as previously announced, as well as continue its plans for the proposed refinery joint venture being discussed by Sunoco and The Carlyle Group.

The joint-venture deal with Carlyle would keep Sunoco’s 335,000 barrel/day Philadelphia refinery in operation. As currently being discussed, Sunoco would contribute the Philadelphia refinery to a joint venture with Carlyle in exchange for a non-operating minority stake. The company would have no obligations to support the refining operations.

This acquisition is a pretty smart move for ETP. Its current cash flow comprises 100% natural gas transportation and logistics, and the Sunoco deal cuts the company’s natural gas cash flow to 70% of the firm’s total and adds a 30% cash flow from liquids transportation. Given the turmoil in natural gas production and pricing, ETP’s diversification into liquids couldn’t have come at a better time.

Sunoco’s shares are trading up 21% at $49.50 in the pre-market this morning, above the company’s 52-week range of $27.76-$43.43. ETP’s shares are up about 2.9% at $49.29 in a 52-week range of $38.08-$54.71.

Paul Ausick

Facebook and Instagram

The fight over the questionable value of social networks, fueled by the upcoming IPO of Facebook, got a boost as Facebook made a billion dollar acquisition. The company it bought — Instagram — is a maker of a popular photo-sharing app for mobile phones. It seems a number of other products do the same thing. Apple’s iPhone is set up to accommodate similar features. But Facebook has been sharply criticized for its lack of a model to make money on mobile devices. Some experts believe this trouble argues against a $100 billion value for the company, which has 900 million users around the world. Other online firms, led by Google (NASDAQ: GOOG), make significant amounts of money with their smartphone applications. Even if Facebook wants to gain ground in the portable device business, $1 billion is a huge amount to spend for a firm that has 30 million users and next to no sales.

Honda in China

Honda (NYSE: HMC) is the latest multinational car company to pursue China’s vehicle market. Chinese drivers bought 18 million cars and light trucks last year, well ahead of the 12.5 million sold in the United States, now the second-largest market. But the growth of sales in China has disappeared, primarily due to the end of an incentive program set by the central government. Global manufacturers will have to content to compete for portions of a large, but no longer fast-growing pie. Honda says it will offer 10 new models in China by 2015. The Japanese company can be added to a dozen others, like Nissan and Ford (NYSE: F), that expect tremendous gains. Each will have to gain market share in a market dominated by General Motors (NYSE: GM), Volkswagen and increasingly aggressive local companies. Honda may want to double sales, but it has nothing other than projections that are nearly impossible to support.

Northeast Refineries

There is a relatively new reason to believe gasoline prices will rise, at least in part of the U.S. CNNMoney reports that almost 50% of the gas refinery capacity in the Northeast will be shuttered within a few months. This will be driven by the closing of a Sunoco (NYSE: SUN) facility. ConocoPhillips (NYSE: COP) turned of the lights at its refinery in the region late last year. U.S. drivers are already bedeviled by gas prices near $4 on average for a gallon of regular. Leaks in platforms in the North Sea, trouble with supply due to sanctions on Iran, unrest in Nigeria and a spread of government protests in the Middle East have pushed WTI crude above $100 and kept it there. There is some hope that, if the U.S. and its energy allies open their strategic oil reserves, crude prices may fall. There was an attempt at that in mid-2011, though, and the cost of oil only stayed down for three months. It is also an open issue of whether the Saudis will cut their production if oil reserves are tapped. The world’s largest oil producer has a number of reasons to keep prices high.

Douglas A. McIntyre

US drivers are already bedeviled by gas prices which are near $4 on average for a gallon of regular. Leaks in platforms in the North Sea, trouble with supply due to Iran sanctions, unrest in Nigeria, and a spread of government protests in the Middle East have pushed WTI crude above $100 and kept it there.

There is some hope that if the US and its energy allies open their strategic oil reserves that crude prices will fall. But, there was an attempt at that in mid-2011 and the cost of oil only stayed down for three months. It is also an open issue of whether the Saudis will cut their production if oil reserves are tapped. The world’s largest oil producer has a number of reasons to keep prices high.

The reason these refineries are for sale is because they are — most of the time — money-losers. Except for Hovensa, all are capable of refining only Brent-quality crude, which is currently the most expensive crude in the world, and the international benchmark for pricing other grades.

Today, Brent costs about $123/barrel. From a 42-gallon barrel of crude at a more or less standard refining ratio (called the ‘crack spread’), a refinery actually produces nearly 45 gallons of refined products (that’s called ‘refinery gain’). Of that production, about 3.5 gallons are kerosene — aka, jet fuel.

The current cost of a barrel of jet fuel is $139 according to the International Air Traffic Association. If it becomes a refiner, the only thing Delta can wring out of that cost is profit, which is currently non-existent in east coast refineries. That’s why real oil companies are closing the refineries.

Of course Delta can sell all the other products — gasoline, diesel fuel, etc. — but then it needs either to contract that out or have a staff to manage the sale. No savings there.

There’s an old joke that the way to make a small fortune in the entertainment business is to start with a large fortune. The same thing is true of the refining business.

Paul Ausick

Amgen Inc. (NASDAQ: AMGN) Cut to Market Perform at Bernstein.

Annaly Capital Management, Inc. (NYSE: NLY) Cut to Market Perform at Wells Fargo.

Genuine Parts Co. (NYSE: GPC) named as Bull of the Day at Zacks.

Google Inc. (NASDAQ: GOOG) Started as Buy at Nomura.

LifePoint Hospitals Inc. (NASDAQ: LPNT) Raised to Neutral at Credit Suisse.

Lululemon Athletica Inc. (NASDAQ: LULU) Cut to Hold on valuation at Argus.

Nuance Communications Inc. (NASDAQ: NUAN) Started as Market Perform at Wells Fargo.

Sunoco, Inc. (NYSE: SUN) named Bear of the Day at Zacks.

Yahoo! Inc. (NASDAQ: YHOO) Started as Neutral at Nomura.

Yandex N.V. (NASDAQ: YNDX) Started as Neutral at UBS.

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The top calls in the last week were seen in the following: The Blackstone Group LP (NYSE: BX); Apollo Global Management, LLC (NYSE: APO); Comerica Inc. (NYSE: CMA); Dell Inc. (NASDAQ: DELL); E-commerce China Dangdang Inc. (NYSE: DANG); Excel Maritime Carriers (NYSE: EXM); First Solar, Inc. (NASDAQ: FSLR); Gilead Sciences Inc. (NASDAQ: GILD); Level 3 Communications Inc. (NASDAQ: LVLT); LM Ericsson Telephone Company (NASDAQ: ERIC); Marriott International, Inc. (NYSE: MAR); Oracle Corporation (NASDAQ: ORCL); Sunoco, Inc. (NYSE: SUN); VIVUS, Inc. (NASDAQ: VVUS); WebMD Health Corporation (NASDAQ: WBMD).  We have added in color and summaries on each.

The Blackstone Group LP (NYSE: BX) hardly budged this week.  The private equity leader was raised to Buy at Goldman Sachs and the price target was $19.00.  That gave almost 20% upside.  In the private equity upgrade was also Apollo Global Management, LLC (NYSE: APO) with a price target of $17.50 for another 20% upside or so.

Comerica Inc. (NYSE: CMA) had a bad week, and it seemed to all get that bad mojo after the stock was downgraded to Sell at Stifel Nicolaus for close to a 4% loss all in all.

Dell Inc. (NASDAQ: DELL) took two downgrades on valuation after earnings failed to offer much continued inspiration: Cut to Neutral at Citigroup; Cut to Hold at Needham.

E-commerce China Dangdang Inc. (NYSE: DANG) was a bit of an “Oops” this last week.  The e-commerce site in China saw its rating Raised to Outperform at Credit Suisse on Wednesday.  Shares tanked the next day and the stock was down almost 10% at one point the following day.  As the casino boss says after they clean you out, “Thanks for playing and better luck next time!”

Excel Maritime Carriers (NYSE: EXM) has already been slapped silly, and its rating was cut down to Underperform by Zacks after already being down over 60% in the last year.  The global shipping market is just not yet coming back into favor with many analysts.

First Solar, Inc. (NASDAQ: FSLR) was cut to Neutral at Susquehanna.  While not a huge surprise for a downgrade any longer, this was just before earnings are due and shares closed down over 4% at $35.58 on Friday.

Gilead Sciences Inc. (NASDAQ: GILD) is now much less in favor since its hepatitis C treatment appears to be far less active than previously thought.  We saw two more downgrades this last week: Cut to Market Perform at Bernstein; Cut to Equal-weight at Barclays.

Level 3 Communications Inc. (NASDAQ: LVLT) was an incredible mover on Thursday after the communications player was raised to Overweight at Morgan Stanley.  Shares rose well over 10% on Thursday and we have an analysis on its move.

LM Ericsson Telephone Company (NASDAQ: ERIC) does not get many upgrades, so it was interesting that the telecom equipment player was raised to Overweight at JPMorgan on Thursday. Shares gapped up, closed up even higher on Thursday, and shares rose almost another 2% on Friday for a total gain of over 5%.

Marriott International, Inc. (NYSE: MAR) is not at the 52-week high like so many stocks, but it was Raised to the highly prized Conviction Buy List at Goldman Sachs.  The price target is $42.00 and that leaves plenty of implied upside from the $34.73 price on Friday.

Oracle Corporation (NASDAQ: ORCL) is almost right back up to where it was before it the bottom was yanked out from under it after its poor earnings.  Apparently that is a concern to at least one… Early in the week this one was downgraded to Market Perform from Market Outperform at JMP Securities now that the stock has run from under $26 to over $29 since the start of 2012.

Sunoco, Inc. (NYSE: SUN) is into refining, so higher and higher gas prices do not really help the outfit.  This was not just downgraded to Underperform by Zacks Investment Research on Friday, it was named as Bear of the Day at Zacks.

VIVUS, Inc. (NASDAQ: VVUS) was a total home run this last week and analysts were forced to chase it higher and higher after the FDA panel recommended that Qnexa get FDA marketing approval to combat weight loss.  After the news came the following calls: reiterated Outperform but raised target to $36.00 at Credit Suisse; Raised to Hold at Brean Murray; Raised to Outperform at Leerink Swann; and Raised to Market Outperform at Rodman & Renshaw.

WebMD Health Corporation (NASDAQ: WBMD) had another bad week after dropping from almost $27.50 down to almost $25.00 after warning that it could face a loss for the year.  Some analysts just expect more pain or cannot take any more pain here with the stock down over 50% from its 52-week high.  S&P Capital IQ cut the rating to Strong Sell from Sell, and Raymond James cut the rating down to Market Perform from Outperform.

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ARM Holdings PLC (NASDAQ: ARMH) Started as Overweight at Piper Jaffray.
AvalonBay Communities, Inc. (NYSE: AVB) Raised to Outperform at Credit Suisse.
Gannett Co., Inc. (NYSE: GCI) Started as Equalweight at Barclays.
Deckers Outdoor Corporation (NASDAQ: DECK) Cut to Neutral at Credit Suisse; Maintained Buy with $105 target at Canaccord Genuity.
First Solar, Inc. (NASDAQ: FSLR) Cut to Neutral at Susquehanna.
Forest Oil Corporation (NYSE: FST) Cut to Hold at Canaccord Genuity.
Monster Beverage Corporation (NASDAQ: MNST) Reiterated Conviction Buy List and raised estimates by Goldman Sachs.
Marriott International, Inc. (NYSE: MAR) Raised to Conviction Buy List at Goldman Sachs.
Nabors Industries Ltd. (NYSE: NBR) Raised to Buy with $30 target at Argus.
PolyOne Corporation (NYSE: POL) named as Value Stock of the Day at Zacks.
Red Robin Gourmet Burgers (NASDAQ: RRGB) named as Bull of the Day at Zacks.
Sunoco, Inc. (NYSE: SUN) Cut to Underperform as Bear of the Day at Zacks.
Salesforce.com (NYSE: CRM) Maintained Neutral but raised target to $145 on Credit Suisse; Raised to Buy at ThinkEquity; Reiterated Buy and raised target to $170 at Canaccord Genuity.
Target Corporation (NYSE: TGT) Raised to Buy at Jefferies.
Trina Solar Limited (NYSE: TSL) Cut to Market Perform at Wells Fargo; Cut to Negative at Susquehanna.

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