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dexion10 (29.47)

My thoughts on Oil, Refiners, Chemicals etc

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December 18, 2008 – Comments (26) | RELATED TICKERS: TSO , VLO , CEM

I see many posts today on oil and surprise that oil broke $36. What many are not realizing is that oil prices are not only dependent on gasoline demand but also chemical demand... that's where there is big weakness and there are several investment thesis that flow from this.

First realize that chemical companies are on their backs right now. Consumers aren't buying anything, and manufacturers are making anything... so chemical companies have NO DEMAND for the byproducts of crude oil.  So the price of oil is only being supported by heating oil (diesel), gasoline, and jet fuel... all of which are in lower demand than they were a year ago.

NEAR TERM I BELIEVE:

1. Oil may make a small rally from these levels on or after Friday's option Expiry... but it'll stay range bound because producing nations are desparate for cash to save their own economies from debt defaults.... there will be no discipline despite what OPEC says.... countries will not default to save OPEC... they'll screw OPEC to avoid default.

 

SHORTS RELATED TO OIL - IMPORTANT ILLUSTRATION:

- Did you ever wonder why chemical company, refineries, and homebuilder stock charts barely appreciated for decades at a time?

SHHHH: Its because of the long-term they don't create intrinsic value (profits don't pay off debts or increase retained earnings). 

When a business cycle ends these business are great shorts because the revert to their mean valuation. SEE: Chemical Companies and Refineries 

 


Remember over the long term the stock market is a weighing scale not a voting machine...really isn't producing intrinsic value: so if charts don't rise for 5 years at a time... that tells that a business model

 

1. Chemical companies with loads of debt and major debt issues due in 2009 may go bankrupt en masse.  Remember chemical companies have aggressively expanded globally and increased capacity in a very low margin industry... Luckily demand had been so strong they that margins were stable.  Now we have overcapacity and companies on the brink of bankruptcy will have no price discipline in the commodity chemical industry... no one will make money and many will go out of business.

FAVORITE SHORTS:  Besides Chemtura (CEM) I don't have favorite chemical shorts... I'll wait for a rally.

2. Refiners - aren't these guys just as screwed as Chemical companies. Refiners globally have taken on debt to build out more capacity than the world needs. Even if we didn't have a credit crisis 2009 wasn't going to be as good as 2007. Refinery capacity globally means that diesel shortages will not be as great for years... Marathon Oil, Valero, Exxon all expanded their refining capacity just as demand from every category hit a wall.

a. Less demand from chemical companies (serving autos, aerospace, industrial applications, and consumer staples) 

b. Less demand for diesel fuel (truckers, construction, and farmers are all cutting back)

c. Less demand from drivers especially in the emerging markets

d. Less demand from airlines as business and consumers (vacations)

 

FAVORITE SHORTS: WNR, TSO... both have too much debt and they have older high cost facilities so as the USA shutters unused capacitiy these guys will be the canaries in the coal mine. Full disclosure I shorted some TSO today because it is technically overbought and laiden with debt and very poor operatons. 

 

LONGER TERM I LIKE OIL...

If you have a 3-year horizon buy a barrel of oil or a LOW COST oil producer.  The bottom line is we are all witnessing "CHEAP PEAK OIL"... get it while you can... because the worldwide production is going to fall as demand falls and eventually the world will be underinvesting in production and we'll have another oil crisis.... but we have time (provided the dollar doesn't completely collapse).

26 Comments – Post Your Own

#1) On December 19, 2008 at 1:14 AM, goldminingXpert (99.97) wrote:

WNR, dude, really? You want to short a $7 stock that earned $1.65 a share last QUARTER? This company may "not add value" though I dispute that notion, but seriously man, how can you short a company selling 40% under book value? We're not a hydrogen economy yet, people still use gas.

Disclosure: Long 287 shares (don't ask why that #) of WNR. 

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#2) On December 19, 2008 at 5:19 AM, DemonDoug (99.87) wrote:

WNR looks like a good speculative play with good upside.

as far as i can tell lots of people are still driving and very very few are using anything other than regular, plus, or premium octane regular gas!

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#3) On December 19, 2008 at 7:44 AM, Alwaysgolong (< 20) wrote:

I work for a major chemical company. 

We manage inventories for tax purposes during the late months of the year. That is, we Deinventory as much as we can before the property tax man comes a knockin.

The company I work for would LOVE to see every tank empty on the Dec 31 midnight gauge sheet. To do that, we idle a lot of equipment as early as November. We ship what we can, and order feedstocks for January delivery. This is normal proceedure regardless of the ecomony or oil price, so you can imagine the magnitude it's carrying this year.

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#4) On December 19, 2008 at 8:12 AM, dexion10 (29.47) wrote:

DemonDoug & GoldminingXpert.... Let's talk about WNR in Dec. of 2009.

The Golden age of refining is over. It's all about demand, capacity, the cost of production, and the cost of refinancing debt.

WNR is high cost production with a large debt load.

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#5) On December 19, 2008 at 8:15 AM, dexion10 (29.47) wrote:

ALSO - SUMMER BLENDING IS MUCH MORE EXPENSIVE... I expect to see the bankruptcies start flowing come summer time!

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#6) On December 19, 2008 at 9:51 AM, goldminingXpert (99.97) wrote:

dexion, did you not catch my earlier post. $1.65 a share in profits last quarter... the SUMMER quarter due to hurricanes. WNR has 3 good refineries and Yorktown, once we sell Yorktown, we'll be low cost and consistently profitable.

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#7) On December 19, 2008 at 11:06 AM, dexion10 (29.47) wrote:

maybe I have got WNR wrong.... wouldn't be the first time.

 

selling yorktown would be a good thing for their balance sheet- however I am skeptical of their earnings guidance.

the demand for crude byproducts is going to be limited for a while.

U.S. capacity additions also work against the group as will foreign capacity additions that displace U.S. exports 

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#8) On December 19, 2008 at 11:17 AM, dexion10 (29.47) wrote:

oh and another thought for refining bulls... how are the companies going to handle bankruptcies of chemical companies - when they fail to get payment for crude byproducts ?

 

I bet that could affect earnings a bit.  Take a look at CEM chart and debt.

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#9) On December 19, 2008 at 1:52 PM, goldminingXpert (99.97) wrote:

I'm not necessarily you're wrong on refiners in general, certainly a company like DK could be headed to the dustbin of history. However, WNR should not be among your favourite shorts. ALJ and DK are much better short to zero candidates. WNR has 4 refineries, not one or two, and a wide network of corporate-owned retail stations--thus, a lot of assets that can be sold if necessary. Not only that, but WNR has very nice margins, and gets to tap into the underserviced Mexican markets for byproducts.

If you must short a refiner (I don't recommend it as they are already down 80-90% off peak) short either a true bankruptcy play: ALJ, or one that is in fact obsolete: SUN (they can't refine sour crude as well as WNR and others can), while going long WNR or VLO. Of all the sectors in the economy, shorting gasoline seems strange when one can short luxury handbags and $300 jeans companies at much higher valuations.

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#10) On December 19, 2008 at 1:52 PM, goldminingXpert (99.97) wrote:

necessarily saying you're*

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#11) On December 19, 2008 at 2:03 PM, dexion10 (29.47) wrote:

thanks goldminingxpert... I've learned a few things about WNR from your comments.

YOU MAY BE RIGHT... 

The yorktown sell is definitely  a good thing if they can pull it off... mind you anyone buying a refinery is an idiot unless it's one of the best in the USA.    

Here's how I saw it after my research and after being both long and short refiners  this summer.  

VLO, FTO or nothing at all.

 

I am short TSO with real money

and would consider shorting WNR if it doubles as you suggest it may. 

 

A COMMENT ON LOW P/E's.... Refineries have low PE's for a reason - their return on invested capital is AWFUL... additionally cyclcals are generally best bought when they have high PE's or no PE's not LOW PE's... they get low PE's at peaks.

 

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#12) On December 20, 2008 at 1:51 PM, strongw (< 20) wrote:

Dexion,Why not keep on shorting home builders? Do you think it is still a good time to short a home builder like MTH. I find that it has a good upside trend from the recent chart. By the way, there is gonna be a morgage aid to homeowners. Do you think it will be a piece of good news for home builder? I am ready to short it.

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#13) On December 20, 2008 at 8:10 PM, dexion10 (29.47) wrote:

I don't know a whole lot about MTH. Before they raised capital by selling stock I thought it was a decent short... now I just don't know because texas had been a good market for a long time (though not a very profitable one) ...

MTH is also trading for about 0.7x book value - granted I'd bet their book value will slowly move lower. Still I'd prefer to short builders trading above 1x book value - so RYL has been my favorite because it's the weakest builder trading > 1x book for my money.

In fact my two favorite homebuilder shorts have been Brookfield Homes (BHS) and Ryland Homes (which i've shorted 10 separate times.

I did a short thesis on BHS in 2007 I thought it could fall from $20 to $10... I was right - except it fell to $2 !  I couldn't always get a borrow on BHS though... so my next favorite short has been Ryland Homes (RYL).

 I currently have a big short in RYL homes... I know the stock and their markets very well.

I also think management has been VERY slow to write-down their land inventory... additionally RYL has a very small inventory. Currently Analysts think RYL small inventory is great... but it means that RYL will have to start building again and that will sap their cash in 2009.   RYL also trades at > 1x book value... much higher than most other builders. 

 

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#14) On December 21, 2008 at 10:34 AM, strongw (< 20) wrote:

You are right. In Nov, several RYL's insider sold their stock. I will follow you to short it.

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#15) On December 22, 2008 at 12:41 AM, dexion10 (29.47) wrote:

Goldmining xpert this is a good article on the issues facing refineries:

 http://online.wsj.com/article/SB122947423155012413.html?mod=yahoo_hs&ru=yahoo

The excess, high cost capacity will be shuttered and the golden egg called deisel fuel exports will disappear when India and Saudi Arabia open new facilities (India's opens next year).

Where will the margins come from ??? 

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#16) On December 22, 2008 at 8:31 PM, strongw (< 20) wrote:

I was short MTH at 14.6 and cover it at 12.4. Unfortunately it plunged into 11.1.  It's more and more difficult to anticipate the trend. I think there is gonna be a rebound in two days later. What do you think of it?

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#17) On December 22, 2008 at 11:22 PM, dexion10 (29.47) wrote:

strongw:

MTH certainly traded like poop today -  down 20% is pretty impressive I must admit.

Again I haven't looked closely at MTH since they did their equity raise. 

The fact that the CFO left to lead bankrupt WCI out of bankruptcy is certainly not a vote of confidence in MTH's prospects.

My take on MTH is that there are issues there. They have less cash than RYL. If you've read Floridabuilder in the past you know that a lack of cash means a builder is a whisper from bankruptcy (bankruptcy results from a lack of cash not insolvency). 

I also know from visiting texas that the Dallas market is getting very ugly and that is going to affect builder margins 

I might consider splitting my money between RYL and MTH. 

What I like about MTH is that it's gotten the benefit of the doubt like RYL for the better part of 6 months (although not recently)... folks seem split on whether it's a good builder or not.  To me it doesn't matter because I don't believe in the business model and I think good builders have more to lose on an absolute basis.

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#18) On December 22, 2008 at 11:22 PM, dexion10 (29.47) wrote:

FYI TSO was down about 10% today... love that short

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#19) On December 23, 2008 at 2:10 AM, dexion10 (29.47) wrote:

Re: book value for refiners.

the replacement cost argument for refiners only works if there is a strategic buyer looking to build new capacity... such a buyer would rather buy an existing refiner vs. building a new refiner.

However if there is no need for new capacity and if the return on capital is very low then book value doesn't matter so much.

Its rare that sum of the parts investing pays off in real life.  TSO's replacement cost is north of $50 per share yet it trades at $11.

The market has been saying for a long time that book value doesn't matter for refiners if the capacity is potentially unprofitable.

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#20) On December 23, 2008 at 2:23 AM, goldminingXpert (99.97) wrote:

Crack spread back up to $12 a barrel. Better start covering the shorts...

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#21) On December 23, 2008 at 2:59 AM, saunafool (97.73) wrote:

You are wrong on one account about Tesoro. Look where they have refineries.

2 refineries in California. Sure, the CA economy is hosed, but refining margins in CA will continue to be higher than the rest of the country due to special fuel formulation. Plus, as housing prices crash, the state becomes affordable again. I'd bet CA population increases in the next 10 years.

1 refinery in Hawaii. This one and the Chevron refinery in Hawaii produce primarily jet fuel for military and civilian uses. No other capacity for thousands of miles.

1 refinery in Alaska. The only fully functional refinery in the south of the state where people actually live. No other capacity for hundreds of miles.

1 refinery in North Dakota. The only one in the country which was originally built to servie ND crude. Not going away.

1 in WA, 1 in Salt Lake City--these are the only 2 where multiple other refineries are just down the street.

So, we'll see what happens, but I wouldn't bet against TSO.

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#22) On December 23, 2008 at 11:54 AM, dexion10 (29.47) wrote:

Betting against TSO has historically been a winning bet.

 

Look at the long term chart.... nothing new here

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#23) On December 23, 2008 at 11:59 AM, dexion10 (29.47) wrote:

saunafool:  By the way - Thanks for your post. It's great when people leave informative posts like yours because then people can make get something out of CAPS.

 

FYI ALL: 

TSO recently filed a mixed shelf ... I expect them to do a dilutive stock offering soon. STAY TUNED

 

 

 

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#24) On December 26, 2008 at 8:22 PM, strongw (< 20) wrote:

Hi, Dexion.  I think that it is a time to buy FNM because Obama will firstly resolve the housing problem. To stabalize economy, Obama need to inject more funds into FNM. Do you think it is a good buy now?

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#25) On December 29, 2008 at 3:42 PM, dexion10 (29.47) wrote:

strong - I do not believe in chasing FNM ro FRE... they are vehicles of the government and the government doesn't care about their equity at all.

I think there is a shot that the democrats will shift enough crappy assets from FNM to the Fed or Treasury to make FNM and FRE worth something... but I think that is a LONG SHOT... not worth taking.

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#26) On December 30, 2008 at 3:49 PM, goldminingXpert (99.97) wrote:

TSO 13.46 +.80 New 3-month high today. Don't short gasoline, buddy, when you can short REITS and homebuilders. The refiners are strong (vs. their peers). 

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