"Refiners enjoy a virtual monopoly. The high price of crude has put the squeeze on profit margins -- especially in the case of gasoline, even though it is selling for over $4.00 now. Gasoline always becomes a political issue during election season.
"Nevertheless, gasoline prices are generally rising. The stock market is also getting 'depression minded,' to the point of paranoia; and this fear is dragging some stocks like refiners lower with the tide.
"The current profit squeeze will not be permanent, but Valero has another arrow in its quiver. They are able to process sour crude, which is becoming more prevalent as exporters keep more of the good stuff (light sweet crude) at home and ship the heavy sour crude.
A few days ago I posted Chasing Value: Valero -- when is a downgrade an upgrade? and since then I have become even more disturbed with our government and the stock analysts, as well as the companies they represent. Eitan Bernstein, an analyst with Friedman, Billings, Ramsey & Co downgraded his expectations for the major oil refiners Wednesday and lowered his price target for Valero Energy (NYSE: VLO) from $77 to $65.
How can this be? The stock was trading around $40 per share and closed Friday at $39.96. As a shareholder who has watched this stock go down, any signs of optimism have to be welcome I suppose, but what in the world is this guy saying. He is saying he has concerns about the sector, but believes VLO will be 61.5% higher this time next year any way!
This makes no sense. He can't be too concerned, can he? If you believed him you would buy all the VLO shares you could get hold of -- and so would he! Maybe he did? Or maybe he is trying to pump up the stock to help a big client? Or maybe he is clueless and does not know what he is talking about? What might his e-mails reveal?
Anyone can predict anything, and they have a right to be an idiot, but what responsibility does he have to eat his own cooking? VLO started the year near a high that is between Bernstein's old and new projections, and I for one have hopes of it rebounding, but I do not have the level of certainty to broadcast such an exact figure. What is the purpose?
The change in his projections of 15.5% is indicative of the silliness of this analysis. We have seen this before and will see it again ... so buyer beware.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money.DISCLOSURE: I currently own shares of VLO.
What can I say, one of my best stocks picks of 2007 has turned into one of my worst of 2008. Valero Energy(NYSE: VLO) the largest independent oil refiner in the United States has experienced shrinking profit margins as oil prices have continued to climb throughout the year.
It was reported in the Associated Press that a Wall Street analyst at Friedman, Billings, Ramsey & Co downgraded his expectations for the major oil refiners Wednesday. In regards to VLO, analyst Eitan Bernstein lowered his price target from $77 to $65.
Analysts are notoriously optimistic and I myself would not hazard a guess picking a number out of thin air given the number of variables to consider, but I would go as far as to say this downgrade makes me laugh.
The stock closed yesterday at $41.25 and is trading down further today around $40. But this is considerably lower then anyones price targets for the stock so perhaps this is a case where the downgrade is actually an upgrade.
This is a company with a price-to-sales ratio of 0.43 and a price-to-book of 1.42 that accompany a P/E of 7 and a yield of 1.41%. I may have been caught in the downdraft of a cyclical stock recommending it last December, but I sure do feel more comfortable recommending to readers that they examine VLO today.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money.DISCLOSURE: I currently own shares of VLO.
Although he has been maintaining a cautious stance on the refining group, energy sector expert Elliott Gue is now boosting the rating on Valero Energy (NYSE: VLO).
In his The Energy Strategist, the advisor explains, "Valero is now attractive for three reasons: superior geographic exposure, refinery complexity and a new focus on profitability."
"Our caution on the refining group was due to expectations that crack spreads would be weak through the spring, a period during which spreads tend to widen. Overall, this call was correct: Refiners have underperformed the energy patch since mid-March.
"And longer term, I have some concerns about new refining capacity expansions due to come online over the next few years. As this supply comes online, it could put downside pressure on margins.
"But over the next six to nine months, the refiners look like a compelling play. Gasoline inventories are now back in line with seasonal norms; it's likely gasoline prices will now rally further relative to crude oil. In fact, we're already seeing an obvious spike in crack spreads.
After five months of tracking my 2008 picks, it is rewarding to finally have a breakthrough -- topping the three major stock indices and Berkshire Hathaway (NYSE: BRK.B) too. It has been painful to have to report each month that I was being bested. However, since I have not seen anything contradicting my original rationale for my eight picks I stood my ground.
Moving into positive territory by pennies was Loews Corporation (NYSE: LTR). Among its holdings is a 51% stake in Diamond Offshore Drilling, Inc. (NYSE: DO) that has been doing well as the world remains desperate for more oil and natural gas.
Bunge Limited (NYSE: BG) was the other stock to cross the line into the black, while Valero Energy Corp. (NYSE: VLO), although improving, remains my worst performer. It is still down almost 28% after five months.
Merrill Lynch upgraded Dell (NASDAQ: DELL) to "buy" from "neutral," according toBriefing.com. The news service also reports that Citigroup began coverage of Valero (NSYE: VLO) with a rating of "buy."
Costco (NASDAQ: COST) was cut to "neutral" at Piper Jaffray, according to24/7 Wall St. The financial website also reports that NASDAQ (NASDAQ: NDAQ) was raised to "overweight" at Lehman Brothers.
Today was a very gloomy day in the stock market with Oil reaching new highs and everything else losing -- almost. Among the few winners, and I mean very few, Apple Inc. (NASDAQ: AAPL), oil, and specialty steel were up. I went through my watch list and found this very short list of winners:
Over the past year, we have been hearing a lot of news about soaring crude oil prices. The easiest thing that we could think about is investing our money into independent oil refiners. Companies such as Frontier Oil (NYSE: FTO), Valero Energy (NYSE: VLO), Tesoro (NYSE: TSO), Alon USA Energy (NYSE: ALJ) or Western Refining (NYSE: WNR) are among those potential stocks on the waiting list.
Though it may seem surprising, Kiplinger.com advises us of exactly the opposite. Kiplinger underlines the fact that refiners represent a way to loose a lot of money... contrary to pipelines, oil producers and energy service companies. This came as the result of people's needs to transform crude oil into gasoline, diesel, jet fuel or heating oil.
The big difference between the cost of crude and the price of refined products is called the "crack spread", and this is where the problem comes in. In May of last year, the crack spread peaked at $27, and even moved up as high as $40 in some locations. This compares to the historical norm of closer to $20. But starting with the spring of 2007, things started changing, and the spread began to narrow... now the spread has fallen down to around $8.50 for some companies.
Reuters reports that ExxonMobil (NYSE: XOM) CEO Rex Tillerson went on The Today Show this morning to discuss the price of gasoline. Why? I think it's because he wants to diffuse political pressure to raise taxes on oil companies. Tillerson said that the price of gas is so high that people are using less of it.
But the subtext, in my opinion, was to put a face on the industry in the mind of the public so that it would be harder for politicians to harness public anger into higher taxes. Some big oil companies now have "too much" money coming in, with oil prices as high as they are. One of them has recently been in low-level debates with investors over what to do with all their cash as in "they can't spend it fast enough," an irony when gas prices are so high.
But as I posted yesterday, not all oil companies think that they have too much money coming in. Many such as Exxon and Valero Energy (NYSE: VLO) have reported disappointing earnings in the first quarter because the price of a barrel of oil has doubled while the wholesale price of gasoline has risen only 39%.
The New York Times has turned into a crying rag for oil refiners. It reports that these defenseless creatures are not making as much money as they did last year. Their profit margins have dropped to an average of $12.45 per barrel of oil, down 60%. The reason? Oil prices have doubled in the last year but the refiners have only been able to raise wholesale gasoline prices by 39%.
I've posted about the problems at ExxonMobil (NYSE: XOM) and Valero Energy (NYSE: VLO), here and here. And the Times has done us a service by calculating these industry averages. It even quotes a a sobbing Lynn Westfall, the chief economist at Tesoro Corp. (NYSE: TSO), "We're just not able to pass along the increased cost of crude oil on the gasoline side." Someone hand Lynn a crying rag!
Thanks to declining U.S. demand -- it's down 300,000 barrels a day -- refiners are reacting by trying to reduce their refining capacity. That's right -- even though many people are paying over $4 a gallon for their gasoline, oil refiners are not making enough money so they are going to cut back on their refining capacity. The utilization rate has dropped from 90.4% last year to 81.4% now -- and if they take refineries off line, they can go back up above 90%.
Valero Energy (NYSE: VLO) shares are trading higher along with most other refiners, as crude oil futures have dropped off from last week's record highs, which could start to help out refiner's margins. Also moving VLO is news that a large California refinery is coming back on line with no significant loss of production after a power outage yesterday morning. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on VLO.
After hitting a one-year high of $78.68 in July, the stock hit a one-year low of $44.55 last week. VLO opened this morning at $45.06. So far today the stock has hit a low of $45.01 and a high of $46.93. As of 12:45, VLO is trading at $46.86, up $2.30 (5.2%). The chart for VLO looks neutral and improving, while S&P gives the stock its highest 5 STARS (out of 5) strong buy rating.
For a bullish hedged play on this stock, I would consider a June bull-put credit spread below the $40 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just six weeks as long as VLO is above $40 at June expiration. Valero would have to fall by more than 14% before we would start to lose money.
VLO hasn't been below $40 at all in the past year and has shown support around $45 recently. This trade could be risky if the price of gasoline falls off if demand starts to lower, but even though there is a slowdown in the US, other global economies are still clamoring for energy, which could keep prices high.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in VLO.
Despite a lower "trade deficit" number, investors have been taking profits. Seeing oil go over $126.00 hurt more than a horrible turnout in financials. Below are the unofficial closing levels:
American International Group, Inc. (NYSE: AIG) fell over 8% to $40.26 after reporting huge losses and disclosing that would raise $12.5 Billion in capital.
It was announced Monday that Valero Energy (NYSE: VLO) has entered into an agreement with Albertson's LLC to acquire 72 convenience stores and fueling kiosks. This will expand Valero's company-owned retail presence in Texas, Colorado, Arizona and Louisiana, where Valero already operates approximately 950 company-owned Corner Store locations.
In the mean time, while Valero's margins have been squeezed this year, it looks like it is intent on diversifying into more of a retail, convenience outlet and sell snacks and coffee in addition to its fuel products. "This transaction offers great synergies with our existing retail network and supply chain," said Gary Arthur, President of Valero's Retail Division. "All of these sites are relatively new and offer strong potential for merchandise growth." Should the 7-Eleven and Circle-K chains be worried? Not yet.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money.DISCLOSURE: I currently own shares of VLO.
Goldman Sachs upped Agco (NYSE:AG) to "buy" from "neutral" and downgraded CNH Global (NYSE:CNH) from "buy" to "neutral" according toMarketWatch.
UBS downgraded HSBC (NYSE:HBC) to "neutral" to "buy" according toBriefing.com. The news service also reports that Morgan Stanley downgraded Valero (NYSE:VLO) to "neutral" from "overweight".
Douglas A. McIntyre is an editor at 247wallst.com.
What can I say, one of my best stocks picks of 2007 has turned into one of my worst of 2008. 
After five months of tracking my 2008 picks, it is rewarding to finally have a breakthrough -- topping the three major stock indices and 
Today was a very gloomy day in the stock market with Oil reaching new highs and everything else losing -- almost. Among the few winners, and I mean very few,
Over the past year, we have been hearing a lot of news about soaring crude oil prices. The easiest thing that we could think about is investing our money into independent oil refiners. Companies such as 
The 
It was 
Here are some highlights from this past week's 
Earnings preview for Ford
Apple shares rise on report Steve Jobs is free of cancer
Toyota whups GM in the first half of 2008
