REFINERS

Energy Q&A Part II: Investing in Oil Refiners and Oil Service Companies
By: Jutia Group

http://www.istockanalyst.com/article/viewarticle+articleid_2302341~title_Energy-Q~amp;A-Part-II:.html

Friday, June 20, 2008 9:24 Q: “Why is it that the refiners aren’t making any money with oil as high as it is? Aren’t they charging more for their services?”
Refiners make money on the “crack spread”. They profit from the difference between the price of crude oil they buy and they price they receive when they sell the refined product. But right now, refiners are squeezed between rising crude prices and consumer resistance at the gas pump.
Refiners have to pay the world price for crude oil. The markets dictate that price. Right now, there are no major physical shortages in the reports from the oil patches of the world. That is, the people who lift oil from the ground all seem to be saying that they can meet the current demand from customers. So the oil is out there. But the world price is what it is. If you are a refiner, that’s the price you have to pay.
At the retail level of the gas pump, people are buying less gasoline. Overall, U.S. consumption is down about 2% so far this year, compared with 2007. (The statistic varies from region to region within the U.S.) People are driving less, according to Federal Highway Administration estimates. Just look at your own behavior. Are you changing your driving habits with gas at $4 or more per gallon?
So with consumers resisting at the pump, refiners have trouble making price increases stick. At $4 per gallon, the refiners are selling less gas. Consumers are fighting back against high prices. Perhaps resistance is not futile, after all.
So the refining sector has taken some hits. For example, Chevron (whos vice chairman I spoke with) lost money on “downstream” operations (meaning refining) in the first-quarter 2008. This loss for Chevron came despite the “upstream” (crude-extracting) operations being immensely profitable.
Any price pullback in oil should benefit refiners, particularly Valero (VLO: NYSE) and Tesoro (TSO: NYSE). These companies have gotten beaten up in the stock markets lately. They are due for a short-term rebound.
Same Goes for Oil Service Companies…
An oil price pullback might also pull down the stock prices and create more opportunity investing in oil service companies, like Apache (APA: NYSE), Halliburton (HAL: NYSE), Superior Energy (SPN: NYSE) and Baker Hughes (BHI: NYSE). Long term, oil is going back up and these are great companies to own. As the saying goes, “Buy the dips.”