Oils and Refiners Refined

Integrated Oils and Refiners with Western Refining on top - live chart

Integrated Oils and Refiners with Western Refining on top - live chart

Now THAT is an interesting chart…

Several things going on. First off, notice how everything else is squashed down into a small lower band, then notice that that band has 25% to 50% growth… Clearly “something is up” in Western Refining. But what?

A brief search showed WNR is part of the group that is positioned to benefit most from the Brent vs West Texas Intermediate price spread. (Basically, Arabia can’t keep Europe supplied with enough light oil, so it has a higher market price, while a pipeline limitation has a glut of sorts in The West as new supplies have come on line).

A nice write-up is here:

http://seekingalpha.com/article/278522-bakken-oil-service-and-refining-plays-for-the-second-half-of-2011

Bakken, Oil Service and Refining Plays for the Second Half of 2011

Michael Filloon

My second largest position is in Western Refining (WNR). I began purchasing this stock on 5-17-11. Western has performed well, and I believe will continue through the second half of the year. The reason stems from my belief that the price of Brent crude will continue to trade at a disconnect to WTI pricing. WTI is West Texas Intermediate, and is a light sweet crude. It is the standard for light sweet crude pricing in the United States. Brent crude is the standard for the North Sea, and more importantly OPEC. Refineries in the mid-continent have seen an influx of oil from areas like the Bakken, Niobrara, Permian, Eagle Ford shales along with pipelined Canadian crude. At the same time, OPEC (and the North Sea) is having difficulties in maintaining Brent production. Much of the large resource areas have been drilled, leaving more difficult and less prolific wells to maintain production.

The majority of a refiner’s costs are the purchase of crude. The WTI price is selling at a discount to Brent, so refiners are able to buy less expensive feedstock.

More at the link, worth a read.

OK, so we also have an odd thing in that plunge on the MRO line. That is the date of the “spin off” of MPC, the
subsidiary.

http://biz.yahoo.com/e/110701/mro8-k.html

On June 30, 2011, we completed the spin-off (the “Spin-off”) of Marathon Petroleum Corporation (“MPC”) to our stockholders through the distribution of shares of common stock of MPC to holders of outstanding shares of our common stock. MPC’s businesses primarily consist of those that previously comprised our refining, marketing and transportation operations. In connection with the Spin-off, our stockholders received 100% (approximately 356 million shares) of the outstanding common stock of MPC. MPC is now an independent public company and its common stock trades under the symbol “MPC” on the New York Stock Exchange.

The distribution of MPC common stock occurred by way of a pro rata stock dividend to our stockholders. Each of our stockholders received one share of MPC common stock for every two shares of our common stock held by such stockholder at 5:00 p.m., New York City time, on the record date, June 27, 2011, and cash in lieu of any fractional shares of MPC common stock.

So what is left in the “rump” of MRO? That’s a bit unclear as the new “profile” is not yet up at Yahoo! and I’ve run into a few old profiles elsewhere… Oddly, MPC does have a profile:

http://finance.yahoo.com/q/pr?s=MPC+Profile

Marathon Petroleum Corporation, together with its subsidiaries, engages in refining, transporting, and marketing petroleum products primarily in the United States and internationally. It operates six refineries in the Gulf Coast and Midwest regions of the United States, which refines crude oil and other feedstocks; and distributes refined products through barges, terminals, and trucks. The company also involves in the marketing of various petroleum products, including gasoline, distillates, lubricants, asphalt, heavy oils, petrochemicals, petroleum cake, propane, and other specialty products to commercial, industrial, and retail customers. In addition, it transports crude oil and other feedstocks to its refineries and other locations; and delivers refined products to wholesale and retail market areas. The company owns, operates, leases, and has ownership interests in approximately 9,600 miles of crude and refined product pipelines to deliver crude oil to its refineries and other locations and refined products to wholesale and retail market areas. Further, it operates 5,100 Marathon branded gasoline stores in 18 states throughout the Midwest and Southeast United States; and 1,350 Speedway branded gasoline and convenience stores in seven Midwestern states. The company is headquartered in Findlay, Ohio.

This profile: http://www.marketwatch.com/investing/stock/MRO/profile

lists these activities (with a lot of history…):

Marathon Oil Corporation was originally organized in 2001 as USX HoldCo, Inc., a wholly-owned subsidiary of the former USX Corporation. As a result of a reorganization completed in July 2001, USX HoldCo, Inc. became the parent entity of the consolidated enterprise and changed its name to USX Corporation. The Company is a global integrated energy company with significant operations in the North America, Africa and Europe. The Company’s operations consist of four operating segments: Exploration and Production- explores for and produces crude oil and natural gas on a worldwide basis; Oil Sands Mining; mines, extracts and transports bitumen from oil sands deposits in Alberta, Canada, and upgrades the bitumen to produce and market synthetic crude oil and vacuum gas oil; Refining, Marketing and Transportation- refines, markets and transports crude oil and petroleum products, primarily in the Midwest, the upper Great Plains and southeastern United States; and Integrated Gas- markets and transports natural gas and products manufactured from natural gas, such as liquefied natural gas and methanol on a worldwide basis. The Company’s integrated gas operations include natural gas liquefaction and regasification operations, methanol operations, certain other gas processing facilities and pipeline operations, and marketing and transportation of natural gas.

So I suppose you could net those two profiles from each other and see what is left.

At any rate, there is some “complication” in the MRO story, but you can get more selectivity out of it now via the two tickers.

Back at WNR

Looking inside that Seeking Alpha story, there are several tickers listed as in a similar situation. It also looks like Holly Corp has split itself into a staid part that is paying a 6.4% dividend as a Limited Partnership HEP, and an exploration / growth part, HFC, who’s chart is just about 1 month long…

OK, some of the other tickers that I might explore at some time:

bas kog wll res cwei ssn cvi hfc bexp tplm

As one “race” can only hold 10 total tickers, I need to break this group up for charting.

Some Tickers in Oil from Seeking Alpha

Some Tickers in Oil from Seeking Alpha

And the rest, with a couple of ‘old standards’:

More Oils

More Oils

So, it looks to me like we’ve got a lot of things “running” in the area, and with a high RSI (so a bit of a worry that we may be getting on this train late, and a ‘bubble’ is a potential… need to do a more detailed financial check on any of these tickers before committing a lot of money or long term money; but for shorter faster trades, right now they’ve “Got Alpha!”.

As “alpha” is the tendency for a stock price to rise from lower left to upper right, the answer to the question “Got Alpha?” is very important…

SSN looks like it’s done it’s ‘pop and drop’, then the “ring down”, so might well be investable at this point (if a financial check shows the “story” really does have legs).

WNR, BAS, and CVI are all “mid run” and may be ‘late stage’ so be careful and only do “momentum trade rules”. (That is, get out as soon as momentum turns against you. Have a stop loss order at all times.) RES BEXP and KOG all look like “corrections” that may have restarted up trends (need to check individual charts / indicators to assure that) but at lower Alpha.

Some, like TPLN, have the typical ‘thinly traded’ volatility and the typical ‘story stock’ dash and drop behaviours. Yet “if the story is true”, could be a nice ride “someday”… And others are looking much more flat in comparison.

OK, these are very volatile prices and in a very ‘touchy’ area. Be careful. OTOH, to find anything rising like that in this market is a special thing.

There is much more research to do to assure the stories are sound, the financials are clean, and the companies are ‘as advertized’. But IMHO at least we have found a pond with fish in it…

For comparison, here is a chart of the “flatter” tickers with the more Super Alpha ones removed (so you can see that they, too, ‘have some action’):

Misc moderate Alpha Oils

Misc moderate Alpha Oils

A much less ‘risky’ entry, in that RSI is “stair steps up” from “near 20”, MACD is just crossing the zero line to positive and with “blue on top” and a fresh “blue on top” from DMI. So not “late in the trend” nor in “RSI near 80 bubblicious” territory…

Much less likely to be “spectacular gains”, but also less likely to have a sudden ‘correction’ and a 6 month ‘ring down’ as you give up and leave with a 50% loss…

Swing trade while watching for a longer term trend to develop ought to work. That MACD has made a ‘bird head’ and looks like it’s going to head sideways at a positive value argues for continued rises from here (of fairly constant moderate pace).

So “pick your risk profile”, do your financial ‘due diligence’, and “go fish” in the oil pond…

In Conclusion

This is an example of how I develop a sector thesis. Start with some bit of news or a WSW derived hypothesis. Look up some tickers. Read a couple of stories. Toss the tickers into races to see how early or late I am in the process / patterns. Then trade one or two on ‘fast charts’ with “swing trade” or “momentum trade” behaviours while I do the “financial due diligence” on some of the tickers to weed out the real stinkers from the list. In this posting, that part is being left as an ‘exorcise for the student’ 8-) as I’ve got a swimming pool calling my name ;-)

(No, that’s not a mis-spelling… getting demons out of your ticker lists is an ongoing effort…)

At present, my only real worry on the “hot tickers” in those charts, such as BES and WNR, is that “near 80” RSI. In hot tickers, that happens, but even in them ‘buy moments’ come where RSI is nearer to 50 than 80; so make sure to ‘time your entry’ for a nice ‘dip’ and NOT buy a spike away from the SMA stack. Prices WILL return to that SMA stack, so the further you are from it, the more likely you are going to be in the “return” more than in the “advance”… The flip side is that as a sector becomes ‘hot’ in the news, you typically get one giant spike. Even entering 1/2 up that spike is a great win, but you MUST have a ‘rapid exit’ strategy if playing that spike momentum trade, and he later you are in that spike, the faster you must exit on a new down movement. So “ride the spike” or wait for a “new entry”? I all depends on your level of commitment to the speed of the trade.

As a ‘sidebar’ note, there is an Oil Refiners ETF ‘in the works’, but not yet listed. One of the things I’ve noticed is that when a sector is hot, new ETFs are invented. Usually, about the time they start to trade, you’ve got an early warning that the ‘hot phase’ is about to end… So this likely has a few months more to run, but watch out for a lot of ‘hoopla’ about a new Refiners ETF…

http://www.indexuniverse.com/sections/news/9390-first-trust-plans-oil-refiners-etf.html

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics - Trading - and Money and tagged . Bookmark the permalink.

5 Responses to Oils and Refiners Refined

  1. R. Shearer says:

    I worked for a major integrated oil company nearly 20 years ago, mostly on downstream but also some upstream support, and I hope to collect a pension from it some day. Anyway, back in the day, the R&M portion of the business always got the raw deal. If oil was high E&P made lots and if it was low E&P sucked off those profits. That experience has made me leary of pure refiners.

    I like the integrated companies because they are fiscally conservative and pay a fair divends.

  2. R. Shearer says:

    I agree with you that now is probably not the time to enter positions in the refiners, but it’s probably a good time to add some to a watch list. Thanks for WNR.

    After leaving the oil industry, I joined a company that manufactured equipment sold into it. I have had the opportunity to work with all of the majors and most of the minors. With quality of employees as a guide, my money is on RDS, CVX, COP, MRO, TSO, SU and SSL (an interesting play somewhat is a category by itself).

  3. E.M.Smith says:

    @R. Shearer:

    I’ve added RDSA / RDSB to one of the charts above. (It trades as the A shares in largest volume, but the B shares seem to have a touch more price rise. No idea why.)

    Any insights into the likely duration of the WNR and Baaken play would be very useful…

  4. R. Shearer says:

    I wish I knew. Sorry.

  5. Chuckles says:

    Not directly related, but I found these two interesting –

    http://www.fraserinstitute.org/research-news/research/display.aspx?id=17853

    http://www.bbc.co.uk/news/business-14214771

    (Ignoring the obligatory BBC ‘Shale is EEEVIILLL!!! drivel in the second, that is..)

Comments are closed.