SHORT THE REFINER RALLY - I'VE LOST HOPE FOR 90% OF THE INDUSTRY
August 08, 2008
– Comments (11) |
RELATED TICKERS: TSO
, WNR
, VLO
I saw a post earlier today by goldminingXpert encouraging people to buy a refiner WNR.
I too used to be a bull on the refiners but the investment thesis is broken. There is no reason to expect these businesses to return to their recent profitability - in fact they are all going to return to their prior multi-decade trend of creating no value at all.
This industry will not be healthy again until some of the poorest refining assets are shuttered and capacity is reduced... WNR and TSO have some of the poorest assets so I'd worry about bankruptcy in both cases... longer term this should benefit VLO, FTO, HOC - as they have some of the best assets - and they will survive the cycle.
Reasons to Short Refiners AFTER a sustained rally higher:
+ New U.S. capacity will destroy margins
+ New Foreign capacity will destroy export markets (diesel)
+ High debt in a time of rising corporate refinance charges
+ Lower U.S. demand further destroys capacity.
The fundamental causes are gone and they are not returning. While crack spreads (margins) may widen in the short term there will be a lasting margin compression for the industry
I implore the author to do so more research here - this is a super dangerous trade to put on. I'll explain below... but quickly here are the bullet points
I've done lots of research on this industry for months and the only stocks I'd own in this space are VLO, FTO, HOC, MRO - and I wouldn't own any of them in the near term except FTO because I believe they'll be bought and they have premium assets and no net debt.
Most of the other independents are in jeopardy of going bankrupt... they are high cost producers in a shrinking market. Their replacement cost doesn't even matter because in some cases the capacity isn't even needed over the long-term.
I won't despute that you can own all of these stocks for a trade
Refining is a pretty miserable business it has been for decades... if you look at all the refininers charts they were flat lines below $10 $20 for over a decade... that tells you that these businesses didn't increase intrinsic value ... they were just barely servicing large debt loads with skinny profit margins.
Refiners are doomed here is why:
Remember the only reason these refining stocks popped the last few years was that oil refining capacity was tight and these guys had wider margins (crack spreads).
Now we have negative trends and secular changes that are going to challenge this industry for years until the weakest refiners like WNR TSO ALJ are put out of business.
++ DEMAND SHOWS NEGATIVE GROWTH
Now we no longer have tight capacity because the U.S. population is driving less and switching to fuel efficient cars.
U.S. CAPACITY
Did you know that there is more U.S. Refining capacity coming online via upgrades from other major refiners like Marathon Oil and Valero.
++ CAPACITY
New refineries are coming online overseas so export markets for diesel which have been propping up U.S. refiners will no longer be as viable and pricing will be destroyed... Additionally some of the new Asian refineries are more modern than many of our U.S. facilities so they are more efficient at refining gas for lower prices.
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