Midwest Refiners – Gaining From WTI/Brent Gap, Fracking Boom – Have Running Room Ahead
It’s been a glorious year for shareholders in a handful of Midwest refineries, where sheer luck of geography led to investor gains of 100% or more, as seen in a stock chart. And the fun, say many, isn’t over yet.
Holly Frontier (HFC), Marathon Petroleum (MPC), Western Natural Resources (WNR) and Delek US (DK) exploit an unusually beneficial chain reaction that started when new technology for pulling oil and natural gas out of shale caught on. Formerly inaccessible product in places like the Bakken shale field in North Dakota and Eagle Ford in Texas came flooding into Midwest storage facilities last year. The abundance has kept the price of natural gas, a product required for refining, near all-time lows. Recent increases to estimates of what can be pulled from those fields suggest low domestic gas prices for a long while.
Moreover, the oversupply caused the price of European-sourced Brent crude oil to take a sustained rise against the price of West Texas Intermediate, creating the gap between the two prices almost never seen before. Such a difference is a bonanza for those Midwestern refiners because unlike their East and West coast competitors, they buy product at WTI prices and sell closer to Brent.
The wonderful advantages for these companies were expected to mitigate in 2013 as competition gets set up in the Midwest and pipeline and rail extensions help alleviate bottlenecks. But there have been delays. Last week, Goldman Sachs (GS) indicated that a $14 spread between Brent and WTI was likely for at least the next three months. Earlier, its forecasts had indicated a $4 spread more likely.
Generally, analyst recommendations for these shares remain strong. Holly Frontier, one of the largest independents, remains a favorite, as does Marathon Petroleum, which was spun out from Marathon Oil (MRO) last year. Most of these companies have lots of cash and not as much reason to spend it on capital projects in the coming year, which make good dividend payments more likely.
Free cash flow yields, a more popular measurement in the sector than earnings yields remain strong.
It’s always tempting to look at today’s price of gasoline as a guide to a refiners’ fortunes. If there were really a big correlation, the 14% plunge of the pump price over the past three months would be alarming for the sector. But to these guys, the price to us isn’t nearly as important as the lines on the WTI/Brent chart, and white space between them.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org.
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