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Reduce Risk By Investing Downstream

The latest crash in oil prices probably has many investors hanging their heads, lamenting the deteriorating quality of many energy investments. After all, with oil prices less than half of what they were just one year ago, and even down a quarter since June, how can anyone have the confidence to put their money anywhere in the sector?

But there are always opportunities.

Exploration companies are struggling under the weight of their own growing debt, and some could go belly up in the coming months. The oil majors are not in such extreme danger, but the ballooning costs of megaprojects has them dealing with their own set of problems. Medium size drillers do offer a good rebound option, as they are sure to ride out the storm and could emerge with an upside to their share prices. However picking out the right companies can be difficult.

Amid all the uncertainty, it is probably safer to stick to one segment of the energy industry that is actually profiting from low oil prices.

Go Downstream

It may seem obvious, but the refining sector is sitting pretty, even more so now that crude prices have failed to rebound in any significant way, despite optimistic predictions to the contrary.

For refining companies, crude oil is a cost, not the final product that brings in revenue. Thus, low prices are a godsend. But the situation is even better than simply refiners enjoying low oil prices.

Refiners sell gasoline to drivers, jet fuel to airlines, and an array of other refined products for an endless list of industrial purposes. Typically, low crude oil prices correlate with a depressed economy, which erases part of their customer base. For example, after the global financial meltdown in 2008, sure, refiners had cheap crude to work with, but they also had a depressed marketplace in which to sell their products.

That is not what we have now. Currently, oil prices are at their lowest levels in years, but the economy is doing relatively well (at least outside of Canada, Brazil, and Southern Europe). Unemployment is low once again in the U.S., and industrial activity is humming along. Not since the 1990s have oil prices been low during a period of strong activity.

That means refiners are enjoying their best few quarters in years. Take Valero (NYSE: VLO), the world’s largest independent refiner. The company has 15 large refineries and processes 2.9 million barrels per day of a broad portfolio of refined products. Many…




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