Rising Star Buy: Western Refining Still Looks Cheaphttp://www.fool.com/investing/general/2011/07/28/rising-star-buy-western-refining-still-looks-cheap.aspx Jim Mueller
July 28, 2011
This article is part of our Rising Star Portfolios series.
My first purchase of small oil refiner Western Refining (NYSE: WNR ) in my Rising Star portfolio has turned out to be a good one, so far. Shares are up some 30% since I purchased them a month and a half ago. Instead of cashing out, though -- we're not short-term traders here at The Motley Fool -- I'm going to add to the position. Here's why:
The spread between prices of Brent oil and West Texas Intermediate, or WTI, oil is about $20 per barrel (Brent being more expensive) and is expected to stay there for at least the next year or two. In fact, it recently hit a record of $23 per barrel. One analyst thinks it could go as high as $50 per barrel by next spring.
This is a catalyst for Western Refining shares because Western Refining doesn't buy oil tied to the Brent price; it uses oil tied to the WTI price. However, it sells its refined products -- gasoline, diesel, aviation fuel, etc. -- at prices determined by the more expensive Brent price. And that means more profit for Western Refining. Do I have to draw it out further? With more profit, a higher share price should follow.
Western Refining, CVR Energy (NYSE: CVI ) , and HollyFrontier (NYSE: HFC ) all use WTI oil, and all three have seen substantial share price increases -- 75% to 90% year-to-date -- since the Brent/WTI spread became large early this year. Valero (NYSE: VLO ) , the largest independent refiner in the U.S., has seen a much smaller price increase of about 10%.
Why and how long?
The reason for the disparity comes down to Economics 101 -- supply and demand. There's too much oil coming to Cushing, Okla., where WTI oil is delivered. There is a lack, right now, of ways to move that oil toward refineries on the Gulf of Mexico and the East Coast. Plus, Brent oil's supply is being crimped with the civil war going on in Libya.
The inability to move the oil from Cushing to Gulf Coast refineries is expected to last for up to a couple of years, but it could be longer. The TransCanada (NYSE: TRP ) "Keystone XL" pipeline could operate by late 2013, but it's facing several hurdles including approval from the Environmental Protection Agency. Enterprise Products Partners (NYSE: EPD ) and Energy Transfer Partners (NYSE: ETP ) operate the "Double E" pipeline, which coul