Riding U.S. Refinery Stock Recovery

Thinking about investing in U.S. refiners? I wouldn't do that without first following our trading partner Chris Damas who today has released some great calls on the refiners. How you paying attention?

My October 14 recommendation to buy U.S. oil refiners Marathon Petroleum, Valero, Alon USA Partners and CVR Refining is working out well. The story is intact. WCS/WTI spread for December is ($6.33) meaning the inland refiners are making money.

In particular, I think Alon is a buy and back to $15.09 this morning (we recommended it at $12.96) with the short selling squeeze sending the units up to $16.80 before falling back. Will the shorts get active again? I think once burned twice shy.

Note Alon’s EPU (Earnings per Unit) and hence CAD (Cash available for distribution) is expected to be only 4 cents for Q3 and a loss of 1 cent for Q4. Therefore I would be cautious around the Alon EPU and distribution release date and sell before the November 8 release date.

Similarly, CVR Refining is up to $26 versus $24 and change when recommended. Analysts expect 50 cents for Q3 and 41 cents for Q4. CVRR had an unexpected FCC outage at Coffeyville refinery which took about a month to fix. I would be cautious around the EPU date on November 1.

I also like CVI Energy the holding company that owns 71% of CVRR and 53% of CVR Partners (UAN). The stock yields 7.3% at $41.29 this morning. The three CVR companies and MLP’s brought their EPS release dates forward by four days at the behest of controlling shareholder Carl Icahn’s IEP group.

I think this was merely a matter of timing all the releases to coincide as IEP owns a big chunk of CVI (82%) and its results are material to IEP. Marathon and Valero have curtailed parts of the massive Garyville , LA and much smaller Three Rivers , TX refineries for maintenance. The shutterings will affect only Q4 and are small relatively to their overall refining capacities. They are buys.

These stocks are for more conservative investors and are rallying nicely. MPC up this morning $1.29 to $72.22 and VLO up 77 to $40.52. We recommended those in the $67 and $36 area respectively. How much higher can they go? The December WTI/Brent discount is $10.76 this morning. Combined with the WTS/WTI sour discount of $6.33, that’s a $16.33 crack spread and very healthy for inland producers.

The Gulf Coast producers bench mark off GOM Mars and Mexican Mayan sour versus Light Louisiana Sweet. I am not sure where that is trading, but it can’t be far off the WCS/Brent spread. Anyways, we are buying all of these due to the EPA’s proposed reduction in biofuels usage and RIN credits for 2014.

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Citigroup Picks Winners and Losers Among U.S. Refiners

It may not be the gospel but we should pay attention as Citigroup picks winners and losers among U.S. refiners. Here is Citigroup's take on oil refiners. The firm expects to see a bottoming of earnings in Q4 for most names, but companies overweight the Midcontinent and/or Midwest could experience a difficult earnings environment through Q1 2014.

The diverging earnings performance will result in positive price appreciation for some refiners - such as Valero (VLO) and Tesoro (TSO), which earn upgrades to Buy - but underperformance for others, such as on Alon USA (ALDW), CVR Refining (CVRR), Holly Frontier (HFC) and PBF Energy (PBF), which will remain pressured by narrowing price differences between WTI and Brent crude.

TSO will benefit next year from a tighter gasoline market in California, and VLO will benefit from wider heavy light differentials in H2 2014 as increased Canadian heavy crude flows to the U.S. Gulf coast, Citi says.

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