AG Edwards Refining & Marketing Brief & IBM Contract

By Yaser Anwar, CSC of Equity Investment Ideas

Here’s an excerpt from AG Edward’s R&M briefing a friend sent me (thanks Ray!). Check back later (midnight) for my analysis of Exxon Mobil.

• US refining margins declined in all regions, except the West Coast. The composite margin fell for the second straight week, and averaged $8.84 versus $10.23 the prior week. For 4Q06, margins are averaging $9.08 below $12.26 in 3Q06 and $10.20 a year ago. In contrast, marketing margins trended higher in all regions.
• Singapore margins are at their lowest level in over four years at $0.04 versus $2.07 a week ago; averaging $2.17 in 4Q06 compared to $4.72 in 3Q06 and $5.78 a year ago. Meanwhile, European refining margins remained depressed at ($1.60) versus ($1.23) the prior week, and are currently averaging $0.28 in 4Q06 versus $1.56 in 3Q06 and $2.78 a year ago.
• Ethanol prices were higher at $2.32, up from $2.22 last week and are averaging $2.07 for 4Q06 compared to $2.67 last quarter and $2.18 in 4Q05. The gasoline spread increased to $0.62, above the historic average of about $0.40, and the blender’s tax credit of $0.51.
• Implications: Refining margins have declined the past two weeks as domestic utilization rates have rebounded from longer-than-anticipated seasonal maintenance. Given our expectation for crude throughputs to remain near current levels, margins should stabilize and potentially trend higher pending near-term winter weather patterns.

IBM wins $4B contract with the German military

• This morning the German parliament approved its defense budget with 7B Euros or $9B allocated for IT HW and services (IBM and Siemens). The Street views this as a significant positive for IBM who will capture ~$4B of the deal (40% of contract).
• The Street is currently modeling ~$13B in services bookings for the December Q with deals announced to date ~$6B (excluding the German military deal).
• IBM usually reports around 20-30% of its deals over the course of a Q. This mega deal will likely materialize in either the Q4 or Q1 reported bookings figure.

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