Oil Refiners’ Woes Signal Opportunity to Snap up Solar Stocks

Refiners' challenges unlock opportunities for solar companies.

Mar 5, 2014 at 9:13AM

Oil refiners are going through a dark phase, one that has not only taken a toll on their profit margins, but that threatens to extend this harrowing narrative for the foreseeable future -- a high crude oil price environment.

A typical day in an oil refinery would entail buying feedstock -- crude oil used as input -- and processing the said feedstock into a finished product such as diesel for sale. Ideally, any business would want to keep its cost of raw materials and production low in order to rake in sizable profits after selling the finished products. However for oil refiners, this ideal is increasingly becoming elusive. Painfully high crude prices have put great pressure on refiners' margins. 

A good case in point is BP plc (NYSE:BP). Poor earnings in 2013 were largely driven by the ailing downstream segment. In the fourth quarter, profits in BP's downstream unit slipped from $1.4 billion in the year-ago period to just $70 million, plausibly explaining the 22% slip in the oil major's full year profits, which came in at $13.4 billion. Royal Dutch Shell plc (NYSE:RDS-A) also serves up another good example. In part because of weakness in its refining segment, the oil major has been compelled to initiate a spate of asset sales that will, at completion, bring in around $30 billion needed to restore balance in the overall business.

Oil refiners with heavier exposure in the U.S. have also suffered, but not as much as their foreign counterparts. West Texas Intermediate (WTI), which determines U.S. domestic crude prices, has continually been lower than Brent, which determines international crude prices. Naturally, this discount has translated into a competitive advantage for U.S. refiners. However, this competitive advantage is coming to an end as witnessed by recent gains in WTI. Apart from the cold weather that increased demand for domestic crude, the WTI/ Brent spread is narrowing because of a number of strong factors, including the fact that the potential revision of the 40-year energy policy that bans crude exports has become a debatable topic, as well as the fact that oil producers, who need high crude prices to offset high production costs, deliver a profit and reward shareholders, are pushing hard for even higher prices.

Essentially, the crumbling of oil refiners is a matter of when and not if. Just to be clear, this is not a blanket statement. There are some refiners like Valero that have unique businesses that can survive even in the absence of the advantage of a high WTI/Brent spread.

Gap in market will be filled by solar energy
As higher prices eliminate refiners whose businesses survived solely on low prices -- and there are such companies -- a gap will automatically be created in the market for refined crude products. However, this time around, don't expect the gap to be filled by imported products. Instead, expect a higher uptake of solar energy.

This is for two reasons.

First, solar uptake has increased in the U.S. on lower costs of installation. According to the Solar Energy Industries Association, U.S. solar capacity jumped 35% in the third quarter of 2013. This was in part driven by the fact the cost of installed solar equipment has dropped more than 50% since the beginning of 2010, according to the Solar Foundation.

Second, and perhaps more weighty, is the fact that environmentalists have a significantly strong lobbying position in Washington. This has come out repeatedly in the past, with a more recent case being the warning that they gave President Obama with regard to the decision that he will make on the Keystone XL oil pipeline. If President Obama goes through with the project, environmentalists warn of significant political ramifications. This plausibly explains why the president has dragged his heels on giving a definitive stance on Keystone XL.

With a strong lobbying position, a scenario where environmentalists push for the U.S. to broaden its energy mix and allocate more dollars to solar energy is very conceivable, especially when a slip in oil refiners provides a ready gap in the market. Not to mention, many companies that are not necessarily energy companies have started exploring green solutions with an unmistakable thirst. For instance, the world's largest solar plant in Nevada is partly owned by tech bigwig Google.

Final thoughts
The Impending fall of U.S. oil refiners could thrust solar stocks into prominence. How should you make your picks?

A good place to start would be SolarCity (NASDAQ:SCTY). Despite trading intimately close to its 52-week high, it is arguably still trading at a discount in view of how its market position and business model meshes perfectly into the changing solar industry landscape.

In addition to other business clients such as Wal-Mart, one of SolarCity's key customers includes major government organizations such as the U.S. military. In view of how pressure from environmental groups is likely to push the government to widen the energy mix and 'give' a higher proportion of the market to solar energy going forward, SolarCity is likely to see higher orders for large-scale projects in the future. Because the government is a business client, these orders will eventually trickle down to the residential market, allowing SolarCity to significantly increase its footprint. There is still more room for growth in this revolutionary solar stock.

Don't follow the crowd
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980's, before the consumer computing boom. Or purchasing stock in e-commerce pioneer Amazon.com in late 1990's, when they were nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play", and then watch as it grows in EXPLOSIVE lock-step with it's industry. Our expert team of equity analysts has identified 1 stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Lennox Yieke has no position in any stocks mentioned. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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