One has to wonder if we would be better off valuing US refiners akin to the railroads-- it would be impossible to replicate the existing the infrastructure of Union Pacific or BNSF today because of congested and densely built cities and towns. While they cannot build out brand new cross-country rail lines, they can certainly expand their existing operations through double-track or extra spur lines, raise the bridges to allow for double-stack intermodal, etc. Union Pacific cannot add another 20,000 miles of track like it could 100 years ago. Today refiners cannot add a new refinery-- but they can certainly buy existing infrastructure, de-bottleneck existing operations, increase throughput capacity, and increase the size of existing operations.
That, I think, is the true value behind these companies. Unless we give away our advantage to overseas refineries and lose our competitive strengths, this might be a new way to look at the refiners. Even if the export ban were lifted, we still have the advantage of scale and cheap natural gas input costs for running the refineries.
If the crack spread disintegrates, then we have a real short/medium-term issue to tackle. Otherwise, these just might be compelling buy and hold names.
Interesting thread here from July given the very recent comments from the company regarding looking at acquiring refining assets, no?
I got burned pretty bad on the refiners on Friday with a big position in Valero-- oversized 9% drop. With that I figured we were in for something pretty horrific so I liquidated nearly everything in my portfolio early Friday afternoon-- held only DUK, NEE, and 2017 calls on Kroger since I figured flight to safety/domestic/yield would play out.
I suppose it's China's turn to play the QE game for a while until we have enough breathing room to follow suit and throw some more piles of cash down the hole again (or keystrokes really-- what else is there?). I've got a feeling that this rout won't be even close to finished until the S&P and the DOW retest the 2007 peaks (so roughly 14,000 DOW and about 1550 for S&P). Things MIGHT be juicy enough to snap up at that point. Those levels were market tops in the 2000's-- might as well be the first place to test larger support ranges for the 2010's. Take a 25% haircut across the board. Only another 10% for the DOW, which with these moves would only take a couple of big days down-- Apple back to $80's and you get there right quick.
Good hunting Toothy-- watch out for the dentists though. They might want to drill ya just for kicks.
Hey Toothie, are we running on the 1 or 5 year charts for the indexes? On the 1 year we are oversold. On the 5 year I would peg another 5-8% down before we approach a bottom.
They can publish whatever they want. They cannot come out and say that every piece of fundamental and technical data we've pitched as sound and justified reasons to buy or sell this stock has gone completely out the window as people will sell off everything that is slightly up or only slight down in their portfolios so they don't get creamed when reporting to their clients. They cannot come out and say that because of the 2007-2009 collapse everyone sees a reversal or correction not as a natural event in the markets, but instead a call for DEFCON 2 while waiting for the FED to spin up the birds and get the bombers in the air loaded with cash.
They might be holding back figuring that the share price will break below $60. The doom and gloom experts might be building a good enough doom anchor this time. We are headed for that that 10% correction on the DOW and could very well get it accomplished by the end of today. The S&P though has another 5% down to get there. Russell already there, Transports already there, NASDAQ not too far behind.
VLO is already down nearly 15% from the high, but the WTI/Brent spread has narrowed from $7 plus a week ago to roughly $5 and under today. The 3:2:1 is falling. I don't they need much more of an excuse to rock this thing. With that kind of downward pressure, Valero board might not be committing full resources to the daily buyback. I truly hope they are, but hope should not be a factor here.
The only thing I can think of for 2018 is that the analysts are building in a belief that crack spreads could narrow in the short-term given the building global supplies of refined products weighing on margins. For the out years maybe factoring the full effects of the current buyback authorization and the assumption of more down the road given managements statements about returning 75% of cash flows.
On E-Trade the earnings estimates up for VLO have had a quite considerable update. Last week they showed up/down/up/down earnings for the current and next few years, never getting above $8 EPS. The current listing shows
That 2018 is an enormous update for the projected earnings, though I'm not sure why they have the trend downshifting from 2015 to 2016 before the next up cycle.
The only prohibition currently is on the export of raw crude oil. Companies can export US crude from Alaska, from essentially anywhere to Canada, and now can export minimally processed condensates to remove the light ends that increase the volatility of the products (so the methanes, ethanes, and butanes, and propane leaving largely napthas and natural gasoline, which is product in the C5/pentane range). EVERYTHING else is approved for export without restriction. Valero is working on adding topping units for their own refining operations, so no benefit there.
Not sure what you're trying to get at with this referral to exports since there really isn't anything Valero needs approval to export.
Just saw this on the conference call transcript from Gary K. Simmons, "I think what we're seeing in terms of the imports is just the volatility in the crude markets. The Brent/TI [WTI] spread comes in and incentivizes people to start importing foreign light sweet. As we talked about in the past, the first place we tend to do that is our Quebec refinery, which we did in the second quarter. In fact, the Brent/TI spread got narrow enough that we even took some foreign light sweet into St. James. You see that same dynamic hold on the medium sours. We maximize Mars and domestic medium sour production into our refineries. And then as the differentials come in, we've actually brought in some Brazilian grades to compete with that when the market gets tight. So I think as long as you see this volatility, you'll continue to see windows where it supports imports of crudes into the market"
Nat gas producers are cash starved. How much do you think the price move move before they start opening the flood gates to capture that premium?
Look how many things are starved for returns that pounce whenever the rate increases. Treasuries start to move higher and funds swoop in to get the higher yields. Their buying pushing up Treasury prices and the yield drops again. The price of oil starts to tick higher and everyone looks to see how many rigs got added (if any) as producers come back online (EOG has already told us they will begin drilling again at a certain price). Nat gas producers flooded the market because the prices were high and they could reap the rewards-- prices collapses with the onslaught of supply. If that supply shows the slightest amount of pressure and the prices increase, what do you think they will do? Drill and supply the market to get that higher return.
Increased power burn is a bigger potential consumer of natural gas than LNG exports. There are enormous potential coal to gas switching coming that will dramatically increase the consumption of natural gas, coupled with a push to move people from heating oil to natural gas in the Northeast if the proposed Kinder pipeline gets approval.
Domestic consumption by petrochemical plants coming online 2016-2020 will be a bigger draw than LNG exports as well.
Does not matter. If we export crude into an already glutted global market, prices across the board will fall or at the very least plateau. There is no logic to expect prices to increase if we export crude-- it is a smoke screen for oil producers to sell to hedge funds and commodity traders that are willing to pay for the tanker storage rates for possible contango profits, i.e., let someone else worry about storing it all.
Valero has already said on their calls that they do not fear a lifting of the export ban as they can source multiple crude grades and have the flexibility to run essentially whatever slate is the most cost advantaged (at the moment that is the crude pouring into the Ship Channel and Houston area terminals, but could easily be Mars, Mayan, Arabian, etc depending on the price. If the price of WTI moves higher with exports pulling down the Cushing glut, they will source more Canadian grades that will still be sold at a discount to WTI.
Which is I think the whole point of today's action. The analysts got it wrong about refiner's not being to keep the high returns going and the big money guys missed the boat and need to get back in. What better way than to short and sell and panic people out to create not just a solid buying price but to free up the volume of shares they need to tack on? Then let it simmer for a while until people see crack spreads holding and a company that just blew out earnings trading under a 10 multiple with oversold technicals. Coiled spring anyone?
Right... and how many of those analysts predicted 2 months back that oil would have already moved higher by now? And we rolled over on the price again. And the gluts continue to build, and the Chinese are likely importing fewer barrels, and the news story turns to the upcoming reintroduction of Iranian crude to the markets. Europe is certainly not back to growth so the Euro will not strengthen, leaving the dollar riding high and pushing down on oil prices.
Just where is this oil price increase supposed to come from? Pure trading? How long will that last? Higher prices will slacken demand which will allow inventories to rebuild especially as we are coming to the tail end of "driving season".
Strategically, better idea to buy assets than sell. It is much easier to double or triple the footprint and distillation capacity of existing infrastructure than to build new. Buy out those that are not running their assets efficiently or with as high an entrepreneurial bent and revamp the operations for maximum flexibility and operational returns. The better we make the existing US refining capacity, the greater the pressure we put on Europe, Latin America, and Asia to shutter their operations or put off/scratch new builds that cannot compete with US operations. The more capacity that gets taken offline (and that never gets added) overseas only increases the demand for US refined product exports which is where the real arbitrage takes place. Add to that the increasing ability to export condensates, refined product feedstocks, ethanol, biodiesel, green diesel, green jet/kero and you have a truly amazing situation for the US petrochemical and chemical industries.
For now-- all of the new build outs and train shipments have been intended to garner best price for crude. What happens once those producers flood the end market with premium priced crude to increase their cashflows? The price at the Gulf Coast drops. Remember, Valero is well equipped to handle multiple types of crude inputs. If Permian trades at a premium to WTI, they will switch to alternate supplies (even imports) that would then be cost advantages. If you get a couple of refineries making those changes (even just a blending level versus wholesale feed slate change) you will get crude supplies backing up in the Gulf rather quickly and that premium will evaporate, giving them the chance to source Permian at once again competitive prices.