An Oil Refinery Set for an Upswing
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It was during the years of housing crisis that oil was trading below the $40 mark. Oil refineries were facing the brunt of low prices and their margins were under tremendous pressure. Since then the global economy has recovered and so have the prices of oil. Slowly and steadily as the global sentiment regarding its growth improves, oil prices are expected to surge. Crude now trades near the $110 mark and oil refiners like Phillips 66 (NYSE: PSX) can again enjoy healthy profit margins.
Phillips 66 came into existence May 12, 2012 after its split from ConocoPhillips. The company owns and operates 15 refineries across US, Europe and Asia, and has a total oil refining capacity of 2.8 million barrels/day. Additionally the company has a natural gas refining capacity of 7.2 billion cubic feet/ day. The refiner operates more than 15000 miles of pipelines across the US and is the second largest oil refiner in the country.
Margins to Increase?
It is being feared that the production of crude oil is going to take a hit due to the falling output in the North Sea offshore rigs. Also Iran is in the news these days for being the epicenter of oil shortage problems. Saudi Arabia however says that it will make up for the oil shortage almost immediately, but until they walk the talk, it would just be speculation. To add to the problems, only 5 floater rigs across the globe are expected to be available by the end of 2012 and by 2014, it is estimated that none will remain economically viable for crude oil extraction. Talking about natural gas, the low prices of the commodity has forced the companies to temporarily shut down their gas rigs. This has taken the count of total operational rigs to a 13 year low and analysts believe that the 45% decrease in the number of rigs is going to reduce the supply levels of the gas in the coming quarter. Natural gas has already risen nearly 70% since its lows in the current year and yet further upside is expected.
Aggressive Play
The company recently announced that it had entered into an agreement with Kinder Morgan Partners. Under the agreement, Kinder Morgan’s 27 miles of pipelines would be used to deliver crude oil to Phillip’s Sweeney refinery. The management of the company also said that it would be leasing 2000 rail cars which would be used to transport shale oil to its refineries. Additionally the 720 mile Sand Hills Pipeline project is also under development with the help of which the company would be able to connect its output from Permian Basin in West Texas to Eagle Ford Shale refinery in South Texas.
These developments would allow the company to get crude and shale gas more easily with less delay, which is expected to benefit Phillips 66 in the form of increased production.
The Numbers Game
The company shares its market space with Holly Frontier Corp (NYSE: HFC), Marathon Petroleum (NYSE: MPC) and Valero Energy (NYSE: VLO).
|
Company |
PEG |
Retained Earnings |
P/S |
|
Phillips 66 |
1.0 |
97.4% |
0.15 |
|
Holly Frontier Corp |
1.6 |
80% |
0.41 |
|
Marathon Petroleum |
1.5 |
86.4% |
0.23 |
|
Valero Energy |
1.7 |
83.2% |
0.16 |
The financial metrics indicate that the stock is the most undervalued stock amongst its mentioned peers. Also the company has the best price to sales ratio. With the maximum retained earnings amongst the peers, the company keeps the maximum percentage of cash in hand in order to undertake any future expansion plans. To top it all the stock yields a decent 1.74%.
Financials
In the recent quarterly results, a 40% increase in earnings was reported compared to the year ago quarter. The refiner saw a massive 70% increase in operating margin, which was primarily due to increasing crude prices. The net profit also came 53% higher compared to the last year's quarter and the figure now stands at $334 million. The company also saw a 1.5% addition to its revenues and overall, the results beat the market expectations.
The Foolish Bottomline
Oil prices are soaring and if everything remains OK in Europe, a profitable ride is expected from the company. A statement was just released that QE3 won’t help in solving the sovereign debt crisis and rightly so. The Eurozone is still the epicenter of worry and if the company can somehow hedge its exposure to crude for the next couple of years, it could very well stay afloat in possible turbulent times. Overall the management looks aggressive, and the company with good financials and fundamentals looks hard to miss.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend HollyFrontier. 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.
