One of the few industry bright spots in the energy sector in the
quarter past were the refiners. After getting beaten down in
November and December on news that the north-flowing Seaway
petroleum pipeline would be reversed to help relieve the glut of
crude oil in Cushing, OK, refiners had a strong January and
February as North American production outstripped pipeline capacity
from North Dakota to Texas while the pipeline reversal was still
being engineered.
Barron's ran a story last weekend about how this
trend was soon due to reverse as the Seaway reversal soon became
fully operational this quarter. The pipeline runs a 500-mile
stretch from Freeport, Texas on the Gulf coast south of Houston to
Cushing and currently has a capacity of 150,000 barrels per
day.
The joint operators Enterprise Products
Partners (EPD) and Enbridge (ENB) initially announced in
November plans to boost capacity to over 400,000 barrels by 2013
and last week they said they expect improvements to allow over
800,000 barrels per day in 2014.
And the whole idea of eliminating the glut of
landlocked West-Texas Intermediate light sweet crude oil (WTI) got
a boost last week when President Obama did a photo-op stop in
Cushing to vow his support for another south-flowing pipeline: the
southern leg of the Keystone XL.
Many Republicans felt this was merely a publicity
stunt to draw attention away from his rejection of the northern
portion of TransCanada's proposed link that was routed through an
environmentally-sensitive area of Nebraska -- especially when the
existing project to move oil from north to south didn't need
Presidential approval, and wouldn't be complete until 2014,
therefore having no effect on gasoline prices in the short-run.
Refining Margins to Get Squeezed.. But How
Soon?
In the Barron's piece, "Going with the Flow," Bill
Alpert suggests that "the end of inland refiners' cost advantage
will hurt the shares of HollyFrontier (HFC), Western
Refining (WNR), and Delek US (DK)."
Alpert goes on to suggest that once these two
south-flowing pipelines are fully operational, North American crude
production from Canada and the Bakken shale will narrow the spread
between WTI and Brent crude. Currently, refiners benefit greatly as
they buy crude, often below WTI prices, and market gasoline based
on Brent prices which have averaged about $20 higher.
But until these pipelines are fully operational,
midwest refiners may continue to reap the benefits of abundant
North American crude and steady-to-rising WTI-Brent prices. Here
are the results of a basic stock screen I ran this morning on
Zacks.com using simple parameters and not even looking for
refiners:
Screen Criteria
Market Cap greater than $2 billion
Percentage increase in 2012 earnings estimates
greater than 10%
Forward P/E less than 15
Zacks Rank of #1 (strong buy) or #2 (buy)
(Click on image to enlarge)
Note that these simple parameters gave us three
refiners -- HollyFrontier, Tesoro (TSO), and Marathon
Petroleum (MPC) -- because they are strong candidates to have both
low valuations and recently rising earnings estimates. And MPC, the
refiner spinoff of Marathon Oil Corporation (MRO) last year,
may be the most intriguing idea here as they have leverage to
something the other refiners don't: a pipeline. While most refiners
discussed have between 75% and 100% exposure to inland crude, MPC
is a 1/3 owner of the giant Capline oil conduit.
Even More Liquidity
This was actually the most interesting and fresh
piece of information from Alpert's article: the possibility of a
third pipeline that could be reversed to carry crude and possibly
Canadian oil sands from central Illinois to Texas.
The Capline has pumped offshore oil north from
Louisiana's Gulf Coast to the oil hub of Patoka, Ill., since the
1960s. Alpert offers this dramatic quote to illustrate the
potential for change in global oil markets if North American supply
is fully exploited:
"Opening all these pipelines will relieve the
stocks at Cushing and wipe out the Brent-WTI spread," says a money
manager who is short the refiners, and who asked that we not use
his name.
Granted, this is a bold prediction by an unnamed
trader who would benefit financially from the result. Still, the
idea is worth considering as a potentially far-reaching event for
energy markets.
Alpert also explains the Capline infrastructure and
potential well...
"Tracking the Mississippi River for 630 miles, the
Capline was built more than four decades ago to carry imported and
offshore crude oil north from the Gulf of Mexico to Midwest
refiners. The 40-inch wide pipeline delivered 1.2 million barrels a
day at its peak. But Capline throughput lately is averaging 15% of
capacity, and demand got so thin a couple of weeks ago that the
Capline's operator, Royal Dutch Shell (RDSA), shut it off on
alternate days. The glaringly underutilized pipeline is 54%-owned
by the master limited partnership Plains All American Partners
LP (PAA), and 33%-owned by Marathon Petroleum
(MPC)."
MPC missed earnings last quarter by 250%, coming in
at a loss of 21 cents vs consensus of -$0.06 as the company
adjusted to higher crude prices in 4Q 2011. But since then,
analysts have been boosting estimates and the stock became a Zacks
#1 Rank on April 3. Here are the EPS tables for MPC:
A Glut of Moving Pieces
The energy patch has been a tough place to make
money this year as it was nearly the worst-performing sector of the
past quarter.
Last week I made a video titled What's Wrong
with the Energy Trade? where I examined many of the moving
parts, often feeling like the proverbial blind man trying to
describe what an elephant is.
But I felt a little better after reading the
Barron's article when I came across this quote from a subject
matter expert...
Supply-demand forecasting is perilous, cautions
refinery-stock analyst Chi Chow, of Macquarie (US) Research. "In
theory it's a very simple analysis," says Chow, "but to figure out
all these moving pieces is a very difficult task."
Perilous at it is, I don't think I'll ever give up
my fascination with energy as the trade of the decade. Hopefully I
learn enough to bank some serious profits in the process.
Here's a link to the Barron's article which also
has an excellent graphic of the pipeline map, crude supply
projections, and refiner "margins per barrel," including those for
CVR Energy (CVI), the current target of hostile takeover
king Carl Icahn.
Kevin Cook is a Senior Stock Strategist with
Zacks.com
CVR ENERGY INC (CVI): Free Stock Analysis Report
ENTERPRISE PROD (EPD): Free Stock Analysis Report
MARATHON OIL CP (MRO): Free Stock Analysis Report
PLAINS ALL AMER (PAA): Free Stock Analysis Report
To read this article on Zacks.com click here.
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