VLO: 2 Oil Refiners That Should Continue to Rally in 2020

Blow-off lows in mid-March- A sign in late April
MPC- an over 130% gain since the March low
VLO- 115% higher over the same period

Refining companies that process crude oil into gasoline and distillate fuels purchase petroleum and sell the products at market prices. Therefore, the profits for refiners are not a function of crude oil or the products, but the processing margin. Crude oil is the input that goes into a catalytic cracker. The process involves heating the oil to different temperatures, which cracks the chemical composition of petroleum into the oil products.

The crack spread or processing margin is a real-time indicator for the profitability of refining companies. Earnings rise and fall with the gasoline and distillate crack spreads. At the same time, the cracks also provide clues about the price path of crude oil as consumers buy oil products. As the demand for products rises, it tends to put upward pressure on the price of crude oil. Valero Energy Corporation (VLO - Get Rating) and Marathon Petroleum Corporation (MPC - Get Rating) are two of the leading oil refining companies in the US. VLO and MPC shares reflect the price action in the crack spreads, and both have more than doubled since the mid-March lows.

Blow-off lows in mid-March in gasoline- A sign in late April- Distillates remain week

The gasoline crack spread moved into negative territory for the first time since 2009 in March.

(Source: CQG)

As the weekly chart shows, the processing margin for refining a barrel of crude oil into gasoline rallied from negative $3.85 to +$9.67 from late March through the end of May. At around $10 per barrel, the crack spread is still over $10 below the level at this time in 2019 but is appreciably higher than the March low.

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Source: CQG

The heating oil crack spread, which is a proxy for all distillate products, like diesel and jet fuels, at just over $8 per barrel at the end of May, was at the lowest level since 2010. Last year at the same time, it was over $15 higher. Demand for crude oil and oil products continues to suffer in the current environment but shares of refining companies have made a significant comeback since the March lows in the stock market.

MPC- an over 130% gain since the March low

Marathon Petroleum Corporation (MPC) operates two of the three leading oil refineries in the United States.

(Source: Barchart)

MPC shares fell to a low of $15.26 on March 19 and were trading at $35.14 on May 29, 2020, a rise of over 130%.

MPC has a market cap of $22.85 billion and trades an average of over 12 million shares each day. The company was most recently paying a 6.6% dividend to shareholders, but that could be in jeopardy if the impact of COVID-19 continues to impact the refining business.

(Source: Yahoo Finance)

MPC beat consensus earnings estimates from Q2 through Q4 2019. In Q1, the company reported an adjusted loss of 16 cents per share. Last year at the end of May, MPC was trading at $45.99 per share.

VLO- 115% higher over the same period

With a capacity of 2.2 million barrels per day, Valero Energy (VLO) is the second-largest refiner in the United States.

(Source: Barchart)

As the chart shows, VLO shares reached a bottom of $31 on March 18 and were trading at $66.64 on May 29, a rise of 115%. VLO has a market cap of $27.169 billion and trades an average of 6.5 million shares each day. The company was paying a 5.9% dividend. A continuation of the yield will depend on market conditions in the refining business.

(Source: Yahoo Finance)

VLO beat consensus estimates for EPS over the past four consecutive quarters. In Q1, the company surprised with a profit of 34 cents per share while the market expected it to lose 15 cents. Last year, at the end of May, VLO shares closed at $70.40.

The second quarter of 2020 will present a challenge for both MPC and VLO when it comes to earnings. However, most companies will get a pass because of the global pandemic. In 2019, the shares of both refining companies rallied from the closing price on at the end of May with MPC reaching a high of $69.65 in late October. VLO moved to a peak of $101.99 in early November.

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As the US economy begins to reopen, we could see both refining companies move even higher after more than doubling in value since their March lows. The risk facing the oil refining business and a host of other companies is another outbreak of Coronavirus that puts the economy back into a coma.

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VLO shares were unchanged in after-hours trading Monday. Year-to-date, VLO has declined -26.94%, versus a -4.51% rise in the benchmark S&P 500 index during the same period.

About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...