Oil Refineries Q3 Earnings: Trick or Treat?
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With oil prices rising once again, downstream companies should show solid third quarter profits. Companies like Marathon Petroleum Corporation (NYSE: MPC), HollyFrontier (NYSE: HFC), and Phillips 66 (NYSE: PSX) should profit from global conditions. There is no reason for the high price of crude oil. China and Europe are both using less because of their economic slowdown . According to the U.S. Energy Information Administration, U.S. oil inventories are up 36.3 mmbbl over last year at this time, yet crude oil futures are up more than $3.78 a barrel over last year. So if demand isn't driving the price, what is?
Marathon Petroleum should report a strong third quarter. Since the beginning of August they have been receiving a premium for their gasoline products in the Midwest. Their Toledo and Detroit refineries have been producing gasoline at this premium due to an oil pipeline leak and two refineries in the area being shut down. The pipeline and refineries have since been reopened and the price of gas increased even more during Labor Day. Their recent announced purchase of the Texas City refinery will help position them for the highly profitable export market. I believe their third quarter results will be strong, but I doubt they will be able to carry the momentum into the fourth quarter.
HollyFrontier stock is up 47% since January. Over the last 3 quarters they have had falling revenue yet higher gross profit! They operate five refineries capable of processing heavy and light crude. They are so profitable because their refinery has access to the cheaper WTI crude, which trades at a discount to Brent crude. The investment in upgrades to be able to process the heavy crude will pay dividends going forward. This niche independent company has paid out four special .50 cent dividends since March 1, in addition to normal dividends. Grab this one now, I did.
Phillips 66 is the winner in its spinoff from Conoco so far, trading 40% higher since May. What is advantageous about this stock is it generates strong profits from its chemical arm. The cheaper natural gas prices will enable that part of its business to reduce utility costs and increase profits. Its purchase of 2000 rail cars enable it to bring the cost advantage of shale oil to its refineries and not have to wait for pipelines to be built. I think Mr. Garland is a CEO with vision, and a man with a plan.
MPC, HFC and PSX are three downstream oil plays that will be far more treat than trick. I expect all three to have strong third quarter earnings. Even though these companies’ stock prices are up for the year, they all have room to go higher.
mwm102 owns HollyFrontier mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. 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.If you have questions about this post or the Fool’s blog network, click here for information.