Oil Prices Are Rallying Again. Time to Buy Energy?

It’s happening again.

Last year it was supply disruptions from Libya, and now it’s the drama in Iran that’s doing a number on global crude oil prices.

Last week, the Iranian government announced that it is halting its shipments to six European countries; this tidbit drove Brent crude above $120 per barrel. This represents the highest level in nearly nine months.

In the United States, futures for the sweeter West Texas Intermediate (WTI) hit $105 today, also the highest price in nine months. In fact, executives at Citizens for Affordable Energy expect to see WTI reach $130 per barrel by the end of next summer.

Of course, this translates into higher gas prices at the pump. According to the Energy Information Administration, gas prices have jumped $0.29 since December. And, this may affect American consumers’ behavior as they make decisions on things like vacations and upgrading their existing cars.

Airline stocks sold off 10% today as investors know that jet fuel is the biggest expense for airlines and when prices rise, profits fall. But, this is just one impact of higher fuel costs. There could be economic implications as well.

The fact that light, sweet crude oil is now back at the same price as during last year’s civil war in Libya is expected to curtail economic growth, especially in Europe, since they depend predominately on light, sweet Brent crude oil. Fortunately, the impact of higher energy prices in the U.S. is less severe than in Europe and is not expected to derail the U.S. economy.

However, for us as investors there is a silver lining to this—this is a great time to invest in refineries, especially those that deal with WTI in the Midwest. If Brent prices rise faster than WTI prices, this increases the bottom line for Midwest refineries. That’s because they price their products based on Brent prices, but ultimately have their costs tied to WTI. Let’s take a look at some of the main refineries and see what their prospects are.

There are two Midwest refineries that I would like to highlight today. They aren’t the largest players in the energy industry, but they still pack a punch.

The first is CVR Energy Inc. (CVI), whose roots extend back more than a hundred years. In addition to perfecting clean transportation fuel, the company has also expanded its operations to produce nitrogen fertilizer products. What’s neat about the two operations is that CVR takes the petroleum coke produced by its refinery and uses it to make its nitrogen fertilizer. CVR is the only producer in North America that uses this process. And, CVR is no lightweight: Between the two divisions, CVR brought in over $4 billion in sales last year. This company is slated to announce earnings on Monday, February 27, and its prospects are stunning. Currently, the Street expects the company to grow earnings by 171%, over triple the estimate for the rest of the Oil & Gas Refining & Marketing Industry. So, it’s no wonder that last week the company attracted the attention of activist investor Carl Icahn, who made a $2.6 billion tender offer of $30 per share of CVI.

I also have my eye on Tesoro Corp. (TSO), an independent oil refiner and marketer that operates seven refineries in six states, including one in Alaska and one in Hawaii. When Tesoro’s production is at maximum capacity, the company can refine 665,000 barrels per day. The end result is gasoline, jet fuel, diesel fuel, liquid asphalt and other fuel products. The company has made a series of smart acquisitions over the last few years, and it couldn’t have timed its growth efforts better. They have ramped up production capabilities and market reach just in time for the price surge. In the most recent quarter, the refiner boasted 40% sales growth, topping the consensus estimate by 41%! And, thanks to improved operational efficiency and effectiveness, Tesoro Corp. posted the best full-year results since 2007! TSO is right in the sweet spot of the oil market.

Let’s see how these two refineries stack up against the country’s largest energy players. Remember, I only consider A- and B-rated stocks as buys; if a stock has a total score of C or lower, it’s best to hold off.

Ticker

Company Name

Barrels per Day *

Fundamental Score

Quantitative Score

Total Score

BP

BP PLC ADS

1,302,350

B

C

C

COP

Conoco Phillips Company

1,787,000

B

C

C

CVI

CVR Energy Inc.

115,700

B

A

A

CVX

Chevron Corp.

1,027,271

B

B

B

HFC

HollyFrontier Corp.

285,350

B

B

B

RDS.A

Royal Dutch Shell PLC ADS

436,400

B

B

B

SUN

Sunoco Inc.

673,000

D

B

C

TSO

Tesoro Corp.

657,300

B

B

B

VLO

Valero Energy Corp.

1,682,300

B

D

C

XOM

Exxon Mobil Corp.

1,855,240

B

C

C

* Daily output information from U.S. Energy Information Administration

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