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Surge in US refining stocks unlikely to last
A bounce in refining stocks on Wednesday may be short lived, as a weak economy, slowing demand and sky-high crude oil prices are expected to persist.
- AP
- Published: 00:28 April 18, 2008
- The Tesoro Alaska oil refinery in Kenai, Alaska. Shares of Tesoro climbed nearly eight per cent on Wednesday on a rising Standard & Poor's sub-industry index after US gasoline inventories fell three times more than expected.
- Image Credit: Bloomberg News
New York: A bounce in refining stocks on Wednesday may be short lived, as a weak economy, slowing demand and sky-high crude oil prices are expected to persist.
Refiners got some long overdue good news that US gasoline inventories fell 5.5 million barrels last week, according to the US Energy Information Administration (EIA), more than three times the expected 1.8 million barrel draw.
This could be a signal that refining margins may rise in the near term, especially as consumption increases ahead of the summer driving season.
Still, investors and analysts said the traditional boost refiners get from increased summer driving may not be as pronounced this year, as high gas prices take their toll on consumers' wallets.
"When you go fill your gas tank and you spend $40 or $50, it makes you wonder what the demand's going to be this summer," said Mike Breard, security analyst at Hodges Capital Management, which manages over $1 billion in assets.
"If I were going to buy any energy stock now I'd rather buy a producer or a driller," he said.
Shares of independent refiners have been hit hard over the last six months - losing as much as a third of their value or more - as margins to produce gas have plummeted from sky-high levels.
The companies have struggled to raise gasoline prices enough to push record crude prices through to their customers.
Gasoline prices are up around 16 per cent since last year, according to US data, while crude oil prices have surged over 80 per cent in the same period.
"The margins are lousy - these guys are getting nothing," said James Halloran, who helps manage about $35 billion at National City Private Client Group.
Low base
"You may see some modest improvement, but that's off a very low base .... It's going to be tough to make any money for some period of time."
After the EIA data were released, the Standard & Poor's sub-industry index that follows US refiners surged 6.2 per cent on Wednesday. Shares of Tesoro climbed nearly eight per cent, while Valero and Frontier Oil rose around 6 per cent .
Even after Wednesday's run, the stocks could be relatively undervalued, using current analyst estimates for their year-end earnings as a base.
Shares of Tesoro trade at around 7.2 times expected earnings, while Valero, Frontier Oil and Sunoco are priced between 8.4 times and 9.5 times estimated earnings.
Roger Read, analyst at Natixis Bleichroeder, said the companies generally trade at about seven times earnings at the trough and around 11 times earnings at the peak.
Read has a 'buy' rating on both the refiners he covers, but said that a weak second quarter could change his view on the companies.
But Eitan Bernstein, analyst at Friedman, Billings, Ramsey & Co, said he expects refining margins to improve in the second quarter from the past two quarters.
"I'm actually selectively constructive on the space," Bernstein said, citing his analysis that the stocks were trading about 10 or 20 per cent below their "implied value."
Refining margins - which vary based on the region where the gas is sold - are still down sharply from last year's levels. East Coast and Gulf Coast margins have been hit especially hard and are around a third to half of where they were in last year's second quarter.
"I think they are probably pretty close to a bottom, but I just don't see them having a catalyst to go up in the near-term," said Soniya Choksi, senior equity analyst at Summit Investment Partners.
Choksi said that if oil prices subsided somewhat, the environment would be much more hospitable to refiners. She said that at a $100 a barrel, she'd probably take a much closer look at the sector.
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