Energy Sector Ideas

[gfp927z]

>>> Why These 3 Oil Refinery Stocks Jumped More Than 30% in April

A crude storage crunch could be a win for oil refineries.


Motley Fool

by John Bromels

May 7, 2020


https://www.fool.com/investing/2020/05/07/why-these-3-oil-refinery-stocks-jumped-more-than-3.aspx


What happened

Shares of oil refiners HollyFrontier (NYSE:HFC), Phillips 66 (NYSE:PSX), and Valero Energy (NYSE:VLO) rose between 34% and 40% in April, according to data provided by S&P Global Market Intelligence. HollyFrontier's shares were up 34.8%, Phillips 66's increased 36.4%, and Valero's soared 39.7%.

Of course, these gains only partially offset the losses refiners sustained in February and March, due in part to the Saudi Arabia-Russia oil price war, and flagging demand for fuel and other refined products due to the coronavirus pandemic. Year to date, all three companies' shares are down by more than one-third, with HollyFrontier's stock price down 43.5%, Phillips 66's down 34.4%, and Valero's down 34.8%.

So what

U.S. refining wasn't in such good shape to begin with. In Q4 2019, major refiners saw their fuel and petrochemical margins tumble as oversupply caused margins to sag. Then, in Q1, oil prices were cut basically in half. That's not necessarily a bad thing for refiners, which make money not from selling crude at prevailing rates, but from the "crack spread": the difference between the cost of a barrel of crude oil and the selling price of the refined products that can be made from it. In theory, a lower oil price can lead to a wider crack spread, benefiting refiners.

But because of the existing oversupply -- and, in March, reduced demand due to the coronavirus -- the selling price of refined products was driven lower, preventing refiners from significantly increasing their margins. Most refineries aren't even operating at full capacity anymore, which is causing problems further up the oil chain, as storage facilities fill up with crude oil that isn't being processed.

Like much of the rest of the oil industry, HollyFrontier, Phillips 66, and Valero have taken steps to adjust their spending levels as they ride out the uncertainty in the sector. HollyFrontier is cutting its 2020 capital expenditures by 15% and is currently running its refineries at just 70% of capacity. Phillips 66 had a similar reaction: It cut its 2020 capital budget by 18.6%, suspended share repurchases, and delayed the start of construction on several pipeline projects. Valero suspended its share buybacks, too, while also deferring $400 million in capital projects until next year, resulting in a projected 16% drop in 2020 capital spending. It said it plans to run its refineries at about 73% of capacity during the current quarter.

All in all, the three refiners' efforts are remarkably similar, as is their share-price performance for the year so far:

Now what

In late April, crack spreads began to significantly improve. On its Q1 earnings call, Phillips 66 reported that the average 3:2:1 crack spread -- referring to three barrels of crude being refined into two barrels of fuel and one barrel of heating oil -- was $9.82 during the first quarter. By mid-April, that figure had already soared into the high teens.

With the crack spread improving and the U.S. taking tentative steps toward reopening, plus a crude oil glut ensuring that refiners would be kept busy in the coming months, Wall Street decided that refiners weren't in such bad shape after all, and bid up their stocks. Those with retail operations, like Phillips 66 and Valero, were also expected to see increased demand as businesses begin to reopen.

The oil sector, though, is still a volatile place. Crude prices are still too low for most shale drillers to profitably produce oil. Yet crude oil inventories are rising to the point that storage capacity is running out. Demand is still low, and OPEC+ production cuts are only in effect through May.

With all that in mind, while refiners are a better bet than many other oil companies, investors may want to avoid refinery stocks -- along with the rest of the industry -- until the dust settles.

<<<