Take a Walk on the Wild Side - Refiners
There are few industries more complex than oil refining. While in graduate school, during the Jurassic era, I was an intern for Champlin Petroleum (then owned by Union Pacific). I sat one summer with 10 fancy school MBAs trying to do a 5 year plan/budget for Champlin’s refining business. My job was do get donuts, but I did learn about the refining business. Crack spreads, complexity ratios, utilization rates, and dozens of other factors were part of building the plan.
The bottom line is the refinery business is very hard to predict short-term, but long-term it actually becomes “self correcting”. Cycles are inevitable, but nobody has ever built the worlds greatest refining company. Crude sources change, new pipelines get built, the only constant is change.
I like companies that “lack earnings visibility”. Welcome to the wild side:
HF Sinclair - DINO - $49 - This is my favorite, and certainly a top 30 idea. HF is the old Holly/Frontier that combined with Sinclair in 2021. In the 1980-2000’s these small mid-continent refiners (often called “teapots”) were worth almost nothing. The boom in the Permian, and also Colorado, changed that. Now the coastal refiners are at a disadvantage. DINO (Sinclair gas stations feature a dinosaur) is buying stock back at rapid rate and laughing at Wall Street. DINO has small but profitable lubricants business, and is getting to breakeven in bio-diesel. I think mid-cycle earnings power is north of $6.00. Earn 4% while you wait.
Phillips 66 - PSX - $141 - These are the best operators in the business, and their assets are in the right place. I loved the stock around $100, with the hope it could go to $150. Let’s be patient here. Barrow Hanley is a big owner, they are really the only value guys with the courage to buy refiners.
Delek - DK - $23 - An interesting small cap idea that needs more work. Complex structure with an LP that is 80% owned.
Calumet - CLMT - $16 - More a specialty products company, not a gasoline refiner. I want to learn more.
PBF Energy - PBF - $40 - Messing with Citgo scares me, pass for now.
NewMarket - NEU - $547 - An interesting lubricants company that competes with DINO
Valero Energy - VLO - $150 - The big winners over the past few years, but I cannot chase the stock here. Good operators, but a little too aggressive for me.
Marathon Petroleum - MPC - $166 - I prefer PSX among the big caps, MPC has older assets.
CVR Energy - CVI - $25 - Dancing with Carl Icahn is a dangerous idea. Too complex, pass
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I have added several new ideas to my top 30 list, let’s keep track of the stocks that are “knocking on the door”, trying to get in the top 20.
Mosaic, FMC, Lindsay, CNH Industrial, American Vanguard
Hasbro
Etsy
BorgWarner
Nexstar Media
Interpublic
Columbia, Oxford Industries, Carters, FIGS
HF Sinclair, Phillips 66, Delek
Evergy, Essential Utilities, +20 more utilities
Darling
Royalty Pharma, Perrigo, Roche, Azenta, Henry Schein, Charles River, Baxter, Avantor, Acadia
Rogers
Yeti
Thor, Polaris, Whirlpool
Choice Hotels, Norwegian Cruise, Viad
Canterbury Park, Marcus
Douglas Dynamics
Goodyear
ConAgra
Liquidity Services
Antero Midstream
Driven Brands
Philip Morris International
Dow Chemical
Astec, Wabash, Matthews, Energy Recovery
Portillo’s, First Watch
Krispy Kreme
Ashland
SunOpta
Ziff Davis
Advance Auto Parts
I always appreciate anyone who wants to discuss refining, but I'd have to disagree wrt where I'd put my money in the space. HF Sinclair overpaid for Sinclair and totally screwed up their RD foray. They never should have closed Cheyenne. Most of their pre-COVID benefits (i.e., inland crude discounts) are mostly gone.
PSX is an NGL play. They still own a lot of refineries at risk for closure over the next 10 years (Bayway, Ferndale, Los Angeles).
VLO is up bc they have the best refineries and have repeatedly been first movers and made good investments when no one else had the courage to do so (hydrocracker investments, DGD). The stock price has performed well, but market cap hasn't gone up much bc they've bought back shares. VLO is the one in this group I'd like to own if it dropped a little more. I have near term concerns regarding the economy/cracks.
PBF is dirt cheap, but lower tier refineries. Definitely the high-beta play and could easily double pretty quickly if the market turns positive.
MPC has good USGC refineries and a good midstream business, but their inland crude advantage is also gone and I think the market hasn't fully recognized that yet.