Another week away from my usual trading desk in New York does lead to a different and useful perspective on energy events without concentrating on the minute movements on my screens, specifically concerning Hess (HES) and PBF Energy (PBF) – both of which I’ve been thinking about.
Here at this small conference on the West coast where I’ve had a chance to talk to a few different voices in the middle of the energy space, there are a few brewing stories that I’ve gotten some interesting and intelligent views – and might even lead to an investment idea.
First is an update on a call I made correctly in WTI-Brent oil spreads which have quickly collapsed in: to close to $7 dollars this week. I made clear in recent columns that this spread move would do two things: give a false positive move to domestic WTI prices, hiking them closer to $100 a barrel, and deliver some bad news to refiners, particularly those in the mid-continent, which have benefited from wide margins for much of the last two years. On crude prices, the $100 WTI price should not be seen as a necessary prelude to $4 a gallon gas, but merely domestic grades ‘catching up’ to the global prices that have been not just steady, but in fact weakening for the past 2 quarters – a ‘fake’ rally, if you will. Second, there have been a few energy guys here who have tried to convince me that the quick drop in the WTI/Brent spread is more financial than fundamental, with a spread squeeze a more likely reason for the quick move – and that there is little chance that spreads will ever regain their historical balance of even money or even WTI over Brent, which would imply an increase of imports of foreign crude. With new Bakken, Gulf of Mexico and Canadian supply chains, that’s very unlikely – they say.
Still, one company that stands to do well in a steady environment of $7-$10 spreads is PBF energy, a refiner that has invested in rail cars to bring cheaper Canadian and Bakken crudes to their east coast refinery, one of the few (besides Valero) to invest in crude by rail (CBR) cars. With PBF taking a big sector wide hit and seeing shares now trading closer to $30 a share, I like this idea, particularly with their better than 4% dividend. I’ve hated the refining space – but prices have moderated and there are some values popping up now. I think PBF is one.
Second, the restructuring of Hess based on the whirlwind pressure of hedge fund giant Paul Singer is a very interesting story this week. First, it has become clear that the namesake of the company is getting the boot: John P. Hess, the son of the founder, is at the very least going to move from dual chairman/CEO roles to occupy only the CEO chair, but that might not be enough for Singer. The head of Elliot management is looking for a full replacement at the lead at Hess, a turnover of the board and a restructuring that will cleave both the long associated (and long profitable) trading arm of the business and divestiture of much of the terminal network with the plan of turning Hess into a more focused E+P business.
Here’s the skinny: While the trading group’s sale might not add much to the Hess bottom line, the sale of the terminal operation very much would: this is a classic ‘sum of the parts’ valuation that would make shares worth healthily more than where they’re trading now, despite their already big run based on the activist’s moves.
And Singer isn’t afraid to take on anyone – and is patient to a fault. His other current big battle is with the Argentinean government, looking for full par payment on sovereign bonds supposedly settled after the Latin America debt crisis almost two decades old now. Even as Argentina laughs at his lawsuits, he’s not giving in – and Singer’s track record isn’t just good, it’s stellar.
Bet against Singer on Hess? I wouldn’t. Hess is a buy, even here.