Tuesday, February 2, 2010

"What on earth are oil investors thinking?" But Crack Spreads are Widening and Smart Buyers Want the Assets (CVX; USO; VLO; XOM)

Here are some of the refinery stories in our link-vault.
From today's FT Alphaville:

Over the last two trading sessions the two largest oil companies in the United States, Exxon and Chevron announced that in Q4 2009 they lost a combined $6.9 million day on turning crude oil into refined products. Wall Street traders reacted to this news yesterday by making NYMEX crude oil even more expensive than gasoline. To explain this seeming incongruity, an unidentified financial trader from Camp Mohawk Trading was quoted as saying. . . IT JUST DOESN’T MATTER, IT JUST DOESN’T MATTER!

That’s Stephen Schork of the widely-read Schork Report, reflecting upon the current illogical investment pattern gripping energy markets.

According to Schork there’s no escaping the fact that — despite some short-term gasoline bullishness — motor gas demand in the United States has undergone a radical and long-lasting transformation since the 2008 financial crisis.

As Schork states, there’s no denying the US economy began recovering in late 2009, but that recovery is producing a very different economy to the one we were used to back in 2007. Essentially, much of the gasoline expenditure US oil companies took for granted, has been “wiped off the map and is not coming back”....MORE

From 24/7 Wall Street (Jan. 12):

Magnifying Refinery Woes

The notion that an integrated oil giant is issuing an earnings warning with oil above $80.00 per barrel may seem ludicrous to most on the Street. Yet that is exactly what is happening at Chevron Corp. (NYSE: CVX). Chevron said that its earnings drop was due to further deterioration in its refining margins, but the issue is that this is not really new and is part of an ongoing theme we have seen in the industry. This will of course tie into Exxon Mobil Corp. (XOM) and to ConocoPhillips (COP) because of the refining and exploration and production, but the real issue is that this only further highlights some of the major refineries like Valero Energy Corp. (VLO), and may highlight some of the issues to a lesser degree also at Marathon Oil Corporation (MRO), and Hess Corporation (HES).

You could perhaps make the same argument that Exxon Mobil Corp. and ConocoPhillips are in the same boat, particularly if you consider that Exxon Mobil is making that huge buyout of XTO Energy (XTO) to diversify more into natural gas. But Chevron did note that exploration and production (drilling) were in line with its expectations. The long and short of it is that the more refinery exposure, the more earnings risk exposure. Chevron did note that exploration and production were looking in-line with expectations.

Valero Energy Corp. (VLO) has been an awful performer of late, almost without regard to which direction oil prices are headed. Marathon Oil Corporation (MRO) and Hess Corporation (NYSE: HES) may have at least some of the same woes, but their stocks have held up far better and both are close to 52-week highs. In fact, Marathon and Hess may even be improperly painted with the same brush in most comparative data if you look at how these companies have performed. That really leaves Valero, and at $18.16 its 52-week trading range is $15.29 to $26.20. As Valero is more and more of a refining pure-play each year, you can look at what Chevron was saying about its business and interpolate the same concerns at Valero.

The hardest part of the rising oil prices is that for refineries they actually have a hard time passing down the cost increases. This is one of those issues that most of the people down on the retail level have a hard time fathoming because so many believe that oil prices are quasi-dictated by the oil companies....MORE
From Bloomberg (Feb. 1):

Crack Spreads Widen as Refineries Close in the U.S.
As refineries from New Jersey to New Mexico close at the fastest pace in three decades, traders in Singapore are profiting from a new plant on India’s west coast and a ship heading for Florida filled with jet fuel from Taiwan.

The so-called refinery crack spread in Singapore, representing the value of fuels minus the cost of crude oil, may climb 50 percent to as much as $4.50 a barrel this year, according to a Bloomberg News survey of five analysts. U.S. refinery margins will drop 30 percent by December, futures contracts on the New York Mercantile Exchange show.

That means higher profits for oil companies and traders in Asia, where consumption is growing 13 times faster than in Europe and the U.S. That’s also why Morgan Stanley can buy jet fuel in Taiwan and ship it 11,500 miles to Port Everglades, Florida, and still make money.

“Fundamentally Asia is now at the center of the physical oil products business, and in a few years Singapore can emerge as a major paper-trading center” for derivatives contracts, not just physical oil cargoes, said Akira Kamiyama, a Tokyo-based trader at Mitsui & Co., Japan’s second-biggest commodity supplier.

Oil consumption in Asia will grow 3.3 percent this year, compared with 0.26 percent in Europe and the U.S., where no new refineries have been built since 1976, according to the International Energy Agency in Paris. North American refiners will leave about 25 percent of plants idle by 2014, the IEA forecast in June.

U.S. Decline

The estimates for rising refinery profits in Asia would mark the biggest jump since 2003, when rates increased 89 percent to $3.95 a barrel from a year earlier, according to Deutsche Bank AG. The Frankfurt-based bank recommends investors buy Reliance Industries Ltd., the biggest refiner in India, and China Petroleum & Chemical Corp., or Sinopec.

As energy demand improved in Asia, Reliance jumped 58 percent in the past year to 1046.55 rupees in Mumbai trading, while Sinopec advanced 47 percent to HK$6.03 in Hong Kong. Valero Energy Corp., the biggest independent U.S. refiner, tumbled 24 percent to $18.42 in New York.

Valero is suffering after the crack spread from processing three barrels of crude into two barrels of gasoline and one of heating oil tumbled 46 percent in the past year in New York trading. The refinery margin will decline another 29 percent to $5.31 for December delivery from $7.47 a barrel for March, futures contracts on the New York Mercantile Exchange show....MUCH MORE

From Reuters (Jan. 22):

Oil baron O'Malley eyes Valero plant for U.S. return

The last time refining maverick Tom O'Malley bought the oil refinery in Delaware City, Delaware, he doubled his money in two years.

Now he may be vying to do it again.

An investment group led by O'Malley is in talks with Valero Energy Corp (VLO.N), the top independent U.S. refiner, to buy the assets of the shuttered 210,000-barrel-per-day Delaware City refinery.

If the deal goes through, it would mark O'Malley's reentry into the U.S. refining sector as it faces its worst crisis in decades. PBF Investments would acquire a refinery that was losing $1 million a day in November, when Valero said it was closing the plant for good.

Delaware City could be the first refinery purchase for PBF Investments, a $2 billion investment vehicle formed in 2008 to buy U.S. refineries. Petroplus (PPHN.VX), where O'Malley is currently chairman, started PBF along with private equity firms Blackstone Group (BX.N), and First Reserve Corp.

"Mr. O'Malley has a track record of buying refineries at low prices, running them for a few years, and then selling them," said Tim Evans, energy analyst for Citi Futures Perspective. "He certainly knows the refinery."

The sale could test O'Malley's vaunted reputation for turning around ailing assets, since it comes at a time when U.S. refiners are reeling from a third straight year of dismal margins, amid slumping fuel demand during a recession....MORE