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Dan Dicker

Dan Dicker

Dan Dicker is a 25 year veteran of the New York Mercantile Exchange where he traded crude oil, natural gas, unleaded gasoline and heating oil…

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These Refiners Could See Some Healthy Returns

We’ve continued to try to find value in the energy space, by trading around and out of winners in the independent E+P’s and majors that have recently peaked – at least for now. We’ve assembled a melange of energy focused names that defy categorization – and we shouldn’t care about that. The point is to make money – period.

Looking over our portfolio of current energy names, there’s a lot to like: a targeted natural gas name (Southwestern), a LNG provider (Cheniere), a start-up Permian basin SPAC (Silver Run Acquisitions) and a refiner (Valero). In adjusting this strange portfolio, I’d feel safest adding to one of them only – Valero. It seems most poised to take immediate advantage of the energy space right now.

Why? Well, several factors are working to the advantage of the refiners today, where they are working to the disadvantage of oil producers in general. The most important has been the very, very slow rebalancing process that has occurred in the shale plays here in the US. I had thought very strongly that we’d be much further along in the process of rebalancing; So far, we’ve seen perhaps a 600,000 barrel a day decline in tight oil production from our highest point in 2014. I would have thought that we could have seen more than a 1.5m barrel a day drop by now, assuming the level of debt and negative cash flows in independent oil producers at $45 crude.

 

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Instead, money continues to chase shale players of all financial worth: Even Halcon Resources (HK) and Sandridge Resources (SD) have found their way out of bankruptcy in the last week, despite having the same underwater assets that sank their common shares to zero. And, they continue to pump despite negative cash flow.

Now, add the simple economics of low gas prices – you know, where price and demand move on an inverted slope? Gasoline consumption is up this year on average more than 3% compared to last year, despite the influx of more economical cars – cheap gas is an incentive to drive more:

 

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All of this points to a continuing strong trend for the refiners here in the US – cheap and plentiful crude and a continuing high demand for product. This is in spite of a less premium crack spread, courtesy of the titular end of the crude export ban. Gasoline has remained a freely exportable commodity, far more capable of finding an overseas arbitrage compared to crude – and refiners have been recently very adept at finding those seams in the markets.

That’s why I prefer larger names like Valero, with a long-standing reputation for dealing with both sweet and sour blends and export opportunities. I suppose I wish that I had had a few bucks in Tesoro (TSO), as it finalized its partnership with biorenewable company Virent. It is clear that Tesoro will now have an advantage in the RIN wars that Valero and others must still contend with, although by the time Virent can make a major dent in RIN quotas for the refiner, I’m not sure that the EPA will have again greatly reduced the burden of blending (as they did in 2015) on all of US refining.

EPA blending standards notwithstanding, Valero, Tesoro and Phillips 66 (PSX) remain worthwhile holdings in your energy portfolio and some of the strongest mid-term opportunities in the energy space today – and one that I’m planning on adding to in my own portfolio.




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