2 Refiners That Are A Rare Bright Spot In Energy Sector

It has been a brutal six months for most investors in the energy sector. Thanks to the collapse in crude and weak natural gas prices many sub-sectors of the energy complex have been decimated, and their immediate return seems highly unlikely. Small exploration and producers have largely been crushed and many will file for bankruptcy within the year if oil stays at these levels, especially those with high debt loads and negative cash flow. Investors want to avoid the majority of these stocks for the time being.

Energy services stocks have also been very weak and the offshore drillers have been sold off brutally as offshore exploration is one of the highest cost methods for developing new oil fields. Many of the smaller names here could also be heading for bankruptcy court if oil does not find a bottom soon. It seems that the carnage in the energy sector has no end.

But, there is one bright spot within the energy industry right now includes the refiners. These firms are benefiting from a fairly wide divergence between WTI (West Texas Intermediate) the domestic benchmark and Brent, the European benchmark where most refined products prices are based on. This is providing for a very high “crack spread” in the first few months of 2015 and refiners should report very strong results when first quarter earnings start filing in. The growth prospects within this space are real and investors who get in now will be able to reap the benefits of these growing companies.

This divergence should continue given production in the United States continues to climb even as rig count has been dropping consistently for months. Barring a full reversal of the policy of banning oil exports, this gap could remain for the foreseeable future. This ban has been in place since the 1970s and it is unlikely to be repealed given the acrimony between Congress and the administration as well as the strength of support from special interests that are benefiting from low domestic energy prices such as manufacturers and chemical producers.

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Positions: Long VLO, PSX

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