Wanna hear something that sounds dirty but isn't?
Those words are ever so important to Motley Fool Hidden Gems selection Valero
It currently sits at $14 for Maya crude, with Arab Medium and Arab Heavy somewhat lower but still quite large. That's a $14 advantage for every barrel of sour crude Valero refines over refiners that are leveraged toward sweet crude, among them ChevronTexaco
For the quarter, Valero turned in earnings of $1.57 per share and showed staggering growth in its refining margins, up from $5.33 a year ago to $6.92 per barrel. You can see what this does for companies with massive operating leverage like refiners by looking at Valero's bottom-line growth: up 127% for the quarter, up 167% for the first 9 months of this year. Once companies with large fixed costs get past a certain point, an enormous amount of each incremental dollar of revenue falls directly to the bottom line.
So why didn't Valero's stock move? Well, it's more than doubled over the last year, and it's not like the sour crude spread is a surprise to most market participants. The simple reality is that people do not believe that the crude spreads of such magnitude are permanent.
What Valero shareholders ought to do is thank their stars that the management of the company made the decision years ago to spend the billions it required to convert their slate from sweet to sour. It gives the company an advantage for every barrel that comes in, even when the spread isn't this wide. And they get to charge the same on the back end for their products as everyone else. After all, do you know whether the gas in your car started as sweet or sour crude?
If you're looking for winners like Valero, you might enjoy Tom Gardner's Motley Fool Hidden Gems . Since July 2003, Tom's picks are up 31% vs. an S&P gain of 5%.
- Bill Mann's "You Don't Know the Future"
- or his "Oil Hits $40"
- or how about his "Not For All the Texas Tea In China?"
Bill Mann owns none of the companies mentioned in this story. The Hidden Gems newsletter is published monthly and contains two stock ideas of excellent companies that have slipped below the radar. Afree trialis yours for the askin'.