During the week, I’ve been appearing on television talking about a rapidly rising gasoline price at the pumps caused by an out-of-control program at the Environmental Protection Agency designed to boost the levels of renewable fuels. I appeared on Bloomberg TV, Fox Business Network with Melissa Francis and at TheStreet.com with Jim Cramer, talking mostly about the trajectory I thought gas prices could take given the upcoming summer driving season.
But what about the refiners whose margins are being squeezed by this EPA program?
Investors are interested in possible opportunities there, even more-so it seems than with a rising pump price.
The sector has taken a dive over the last two days, dropping a few percentage points in a rising overall index, somewhat bringing down the high-flying share prices of huge momentum plays like CVR Energy (CVI), Tesoro (TSO), Valero (VLO), Marathon Petroleum (MPC),Holly Frontier (HFC) and Western Refining (WNR).
Since these stocks have been some of the best performers for 2013, the question is: Does this moderate drop represent an opportunity to reload? I say no.
Chasing the refinery stocks through their massive rise this year has been difficult, if not impossible, to time correctly. I recognize the enthusiasm that goes with momentum stocks that are on a run like these, and important fundamentals we have often discussed are driving them. But, as a sector, these prices are far ahead of where they are comfortable for me to recommend, even with this moderate downdraft.
Yes, the margin squeeze from the skyrocketing price of renewable identification number (RIN) credits is still only a small part of refiner profitability, and it could easily be passed along to the pump if the futures markets cooperate. Yes, exporting gasoline is a possible if costly alternative for them. Yes, I still believe spreads between Brent crude and West Texas Intermediate will remain robust for 2013, and spur delicious continuing margins overall.
But I also remember buying Tesoro shares at $10 and considering myself a genius, then selling them for a 40% profit at $14 in 2009. Now, do I want to invest at $56 after a drop from $59? No thank you. When this refinery margin craps game ends, as it did in 2007 and will again, I don't want to be long at the highs.
My advice has been to engage in those divestiture plays in refining that have emerged where the investor momentum hasn't yet played a part. That would include the spin-offs -- as with Marathon Oil (MRO) into Marathon Petroleum, or Tesoro Logistics (TLLP) from mother ship Tesoro, or CVR Refining (CVRR), which had its initial public offering more recently.
Wait for those opportunities. One of the biggest coming up is the Chevron (CVX) spin-off in the mold of the Phillips 66 (PSX) spin-off from Conoco-Phillips (COP). It’s not been announced yet, but I think it’s coming. I missed the Phillips 66 opportunity which was a big winner, but I won’t miss the next one. I have no reason not to think that each one of these spin-off plays represents a far better opportunity than does trying to catch these other falling refinery knives.