Across the U.S., Americans are experiencing the changing colors and mild temperatures of fall. Although it may feel nice now, the harshness of winter will soon arrive for many. Consumers do have some good news in store though, as lower crude oil prices should mean lower heating costs, especially for those using heating oil during winter.
Lower crude oil prices also equate to cheaper input costs for oil refining companies, which turn crude oil into a finished product such as heating oil, jet fuel, or diesel fuel.
Oil refinery prospects are good. It’s been a tough year for the energy sector as crude oil prices have dropped more than 50 percent. Refiners, though, are one segment benefitting from these price drops since they will lower input costs.
“It is very profitable to make diesel and heating oil in the November-through-March period. Refiners are beneficiaries when the price of crude oil drops, and a really cold winter could deliver handsome profits for them,” Tom Kloza, global head of energy analysis at Oil Price Information Service said.
In spite of the global crude oil downturn, refineries reap revenues from the difference between crude oil purchasing costs versus what they receive in sales from a refined product such as heating oil.
“Right now, if refiners buy crude oil at $50 a barrel, they can sell heating oil in the $65 to $70-per-barrel range. Those are nice profits,” Kloza said. “That compares to a $5 to $10-per-barrel difference that prevailed from 1980 to 2005. There has been a paradigm shift. Refining is very prosperous.”
Below is a look at three refinery company stocks trading below fair value per Morningstar.
Marathon, an independent U.S. refiner with seven refineries nationwide, has their MPC rated at four stars, with fair value at $65. Their stock recently traded at about $49.
Valero, a San Antonio based exporter, has 14 refineries in the U.S. and exports more refined products than its competitors and has a VLO rating at 3 stars. Their fair value is estimated to be around $68, and their stock recently traded around $63.
Phillips 66, another independent refiner, received a 3 star rating with a fair value estimate of $88 compared to trading recently around $81.
Regardless of the end demand levels, profit margins continue to be rich for refiners and above the average of more historically normal levels. If El Nino doesn’t deliver the expected warmer temperatures and heating demand soars, winter revenues may increase more than expected for refiners. “They all pray we will have a Siberian Express polar vortex,” Kloza said.