In its announcement Tesoro pointed out the obvious problem:

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

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

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

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

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

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

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

Paul Ausick

Other new additions to this were made but the rest did not have an implied 50% upside.  We have offered details on each.

Tenneco Inc. (NYSE: TEN) is in the auto components sector and sports a $1.8 billion market capitalization rate.  The stock trades at $29.97 and the firm’s price target is $53.00 as a growth pick, well above the Thomson Reuters consensus price target of $45.10.  This gives implied upside of over 70%, but keep in mind that the firm added it to the Top Picks list in June when shares were around $37.50.

Read Also: Small Caps Under $1 Billion With 50% Or More Upside From Credit Suisse

Western Refining Inc. (NYSE: WNR) is in the Oil and Gas Refining sector and at $13.29, it has a price target of $20.50 at Credit Suisse and a consensus price target from Thomson Reuters of $18.75.  This pick was newly added in December to its best ideas list with an “Outperform” rating and was listed as a value pick.

Apollo Global Management, LLC (NYSE: APO) may seem like a surprise since it is in private equity.  Credit Suisse’s $1.5 billion pick in market capitalization currently has a unit price of $12.30 and a market cap of about $1.5 billion.  The firm expects that its shares will trade up to $21.00 versus a Thomson Reuters consensus target of $17.77.  This pick was added in December with an “Outperform” rating as a value pick and leaves an implied 70% upside if the firm’s projections were correct.

Read Also: Canaccord’s Top Tech Picks For 2012

Synovus Financial Corporation (NYSE: SNV) wa surprising to see on the list since very few investors are willing to enter the troubled sector.  The market value for this regional banking outfit is currently $1.15 billion based upon a $1.46 share price.  This was added as an “Outperform” rating as a value pick in December when shares were about $1.35, but the price target objective from Credit Suisse is $2.25.  That leaves 52% upside remaining and the Thomson Reuters price target is also at $2.10.

MasTec Inc. (NYSE: MTZ) is valued at $1.48 billion in the Construction & Engineering sector.  The current price of $17.48 leaves “only” 37% implied upside to Credit Suisse’s $24.00 price target.  The reason for this inclusion is that the most recent price on the updated list was at $15.11 and that was above the 50% threshold even if this is under the price when added to the best ideas list in September as a growth pick.

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JON C. OGG

The unofficial closing bells put the DJIA down less than 1 point to 12,019.42 (-0.01%), the NASDAQ rose less than 1 point (0.03%) to 2,626.93, and the S&P 500 fell 0.02% or less than 1 point to 1,244.28. Folks, that’s flat!

There were several analyst upgrades and downgrades today, including Lululemon Athletica Inc. (NASDAQ: LULU) raised to ‘buy’ at KeyBanc. Other ratings action Cliffs Natural Resources Inc. (NYSE: CLF) raised to ‘outperform’ at Credit Suisse; Domino’s Pizza Inc. (NYSE: DPZ) started as ‘hold’ at KeyBanc; Western Refining Inc. (NYSE: WNR) raised to ‘outperform’ at Credit Suisse; Sina Corp. (NASDAQ: SINA) raised to ‘buy’ at Deutsche Bank; and Guess? Inc. (NYSE: GES) cut to ‘neutral’ at Citigroup.

Here are today’s big post-earnings news reactions with prices during the last half-hour of trading:
Big Lots, Inc. (NYSE: BIG) is down -8.6%% at $36.34; Zumiez Inc. (NASDAQ: ZUMZ) is up 23.9% at $28.95; Royal Bank of Canada (NYSE: RY) is up 3.4% at $47.82; and Bank of Nova Scotia (NYSE: BNS) is down -3.1% at $48.08.

Several other standouts from today are as follows…

YRC Worldwide Inc. (NASDAQ: YRCWD) is up 29.7% at $12.61. The freight hauler concluded a 1-for-300 reverse split that drove the share price to $9 from $0.03.

Western Digital Corp. (NYSE: WDC) is up about 7% at $31.30. The computer disk drive maker announced that it was resuming operations at one of its flooded Thai plants and raised its revenue estimate for the current quarter. More details here.

Research in Motion Ltd. (NASDAQ: RIMM) is down about -9.6% at $16.79. The smartphone and tablet maker announced an inventory writedown of $485 million for unsold PlayBook tablets and said that full-year earnings would be lower. Detailed coverage here.

Tenet Healthcare Corp. (NYSE: THC) is down more than -10% at $4.20. The health care facilities operator likely is suffering from a lowered target price from BMO Capital Markets with rating of ‘market perform’.

JA Solar Holdings Co. Ltd. (NASDAQ: JASO) is down nearly -7% at $1.74. The solar PV maker is likely giving back gains made over the past two days. The was little reason for the gain in the first place, so that investors are taking it back should be no surprise.

Stay tuned for Monday. We have noted a speech due from Chicago Federal Reserve President Charles Evans and short-term Treasury bill auctions in the morning. Here are other noteworthy events scheduled for Monday (all times Eastern):

• 10:00 a.m. – Census Bureau factory orders report
• 10:00 a.m. – Industrial Supply Management non-manufacturing index

Have a great weekend.

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Paul Ausick

Arch Coal, Inc. (NYSE: ACI) named as Bear of the Day with a $13.00 price target at Zacks.
American Tower Corporation (NYSE: AMT) Started as Outperform at Macquarie.
Berkshire Hathaway Inc. (NYSE: BRK.B) named as Bull of the Day with a $91.00 price target at Zacks.
Cliffs Natural Resources Inc. (NYSE: CLF) Raised to Outperform at Credit Suisse.
Crown Castle International Corporation (NYSE: CCI) Started as Outperform at Macquarie.
Deere & Company (NYSE: DE) named as value stock of the day at Zacks.
Domino’s Pizza, Inc. (NYSE: DPZ) Started as Hold at KeyBanc.
Guess? Inc. (NYSE: GES) Cut to Neutral at Citigroup.
Lowe’s Companies Inc. (NYSE: LOW) Raised to Buy at Goldman Sachs.
Lululemon Athletica Inc. (NASDAQ: LULU) Raised to Buy at KeyBanc.
Sina Corporation (NASDAQ: SINA) Raised to Buy at Deutsche Bank
Smith & Nephew plc (NYSE: SNN) Raised to Overweight at Morgan Stanley.
Western Refining Inc. (NYSE: WNR) Raised to Outperform at Credit Suisse.

Argus made changes to its institutional model portfolio: added shares of Walgreen Co. (NYSE: WAG) and sold out of shares of Sun Life Financial Inc. (NYSE: SLF).

Credit Suisse is out positive on generics saying that the news flow on generic Lipitor has obscured the bigger picture on Watson Pharmaceuticals, Inc. (NYSE: WPI) and Teva Pharmaceutical Industries Limited (NASDAQ: TEVA). The firm recommends buying WPI after its recent weakness as strong fundamentals just got cheaper.  It also recommends buying TEVA for the longer term and as a turnaround story for 2012.

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JON C. OGG

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

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

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

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

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

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

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

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

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

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

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

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

Paul Ausick

Several other standouts from today are as follows…

Valero Energy Corp. (NYSE: VLO) is down nearly -9%, at $22.67. Valero and other refiners’ stocks got hit with a narrowing of the gap between WTI and Brent crudes, as well as an announcement by Enbridge Inc. (NYSE: ENB) that it is buying a 50% stake in the Seaway pipeline from ConocoPhillips Corp. (NYSE: COP) and reversing the pipeline’s flow to carry 150,000 barrels/day of crude from Cushing, Oklahoma, to the Gulf Coast.

Western Refining Inc. (NYSE: WNR) is down more than -13%, at $13.47, and Marathon Petroleum Corp. (NYSE: MPC) is down about -11%, at $32.91.

Novagold Resources Inc. (AMEX: NG) is up more than 23.5%, at $10-.89. The company has appointed a new CEO to start in January and also announced that it would spin-off a subsidiary, NovaCopper, to current NovaGold shareholders.

Pacific Ethanol Inc. (NASDAQ: PEIX) is up more than 3%, at $1.37. The company announced that it has fully retired $35 million in senior convertible notes.

Amtech Systems Inc. (NASDAQ: ASYS) is down more than -17%, at $8.59. The company issued a statement that it expects to post $21-$23 million in sales for the third quarter, where analysts had been expecting revenue of $50 million.

Unilife Corp. (NASDAQ: UNIS) is down about -12.5%, at $4.17. The company priced a secondary stock offering of 8.25 million shares at $4.35, well below yesterday’s closing price of $4.76.

Stay tuned for Thursday. Cleveland Federal Reserve Bank president Sandra Pianalto and New York Fed president William Dudley are giving speeches tomorrow afternoon. Here’s a list of other noteworthy events (all times Eastern):

• 8:30 a.m. – Housing starts
• 8:30 a.m. – Initial unemployment benefits claims
• 10.00 a.m. – Philadelphia Federal Reserve Bank’s October business outlook survey
• 10:00 a.m. – E-commerce retail sales
• 10:30 a.m. – EIA weekly natural gas status report
• 1:00 p.m. – 10-year TIPS auction
• 4:30 p.m. – Federal Reserve balance sheet and money supply report

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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

Altera Corporation (NASDAQ: ALTR) Cut to Hold at Auriga.
Dow Chemical (NYSE: DOW) Started as Hold at Jefferies.
Dunkin Brands Group Inc. (NASDAQ: DNKN) Started as Hold at Argus.
HSBC Holdings plc (NYSE: HBC) target cut at Macquarie.
Itron Inc. (NASDAQ: ITRI) Cut to Underperform at BofA/ML.
Koninklijke Philips Electronics (NYSE: PHG) named as Bear of the day at Zacks.
Steven Madden Limited (NASDAQ: SHOO) named value stock of the day at Zacks.
Western Refining, Inc (NYSE: WNR) named Aggressive Growth stock of the day at Zacks.

JON C. OGG

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

Major integrated oil companies — Exxon Mobil Corp. (NYSE: XOM), BP plc (NYSE: BP), Chevron Corp. (NYSE: CVX), and ConocoPhillips Corp. (NYSE: COP) — have enjoyed robust profits even as prices for crude have been falling because the differential between Brent and WTI has been so wide. Refiners like Valero Energy Corp. (NYSE: VLO), Tesoro Corp. (NYSE: TSO), Marathon Petroleum Corp. (NYSE: MPC), and Western Refining Corp. (NYSE: WNR) are also enjoying robust earnings on the crude oil price differential.

The reason is that most crude imports (priced relative to Brent) go to the US Gulf coast where much of the nation’s refining capacity is located. Cheaper WTI crude is bottled up at Cushing, Oklahoma, where there is no pipeline to carry the black stuff to Gulf coast refineries. The Cushing facility is essentially full, which holds prices down for WTI.

What happens is that refineries may be paying for crude at WTI prices, but selling the refined products as if the feedstock were Brent. Pump prices don’t fall as far or as fast at consumers might expect.

According to the US Energy Information Administration, in the second week of August, US spot crude (WTI) cost $82.86/barrel. The average pump price for gasoline was $3.73/gallon. In the second week of October 2010, spot WTI crude cost $82.29/barrel, and the average pump price was $2.87/gallon.

In the same week, Brent crude sold for $84.51/barrel, only a slight differential to WTI. Based on historical pricing, US consumers should be paying less than $3/gallon at the pump today. We are not because of the wide differential between Brent and WTI crudes.

For integrated oil companies and refiners, the return of Libya’s 1.6 million barrels/day of production could spell the end of this refining heyday. As the differential between Brent and WTI closes, refining profits have to decline.

Events in Libya remain undecided, and even if the current regime is replaced it will take some time to get the oil flowing again. Another factor affecting the price of crude is the gloomier outlook for the global economy. As GDP estimates fall, the effect on crude is to reduce demand and lower the price.

The price for Brent crude has further, perhaps much further, to fall. In the short term, Libyan events will drive the price. In the longer term, it’s the global economy.

Paul Ausick