JBL: Global Gluttony

Refineries, just like the land drillers I recommended two weeks ago, trade in line with oil prices. No matter the price of oil, there is simply no additional refining capacity and none coming online.

Last year was a record one for Valero, with an 87% increase in EPS. Seventy percent of Valero's oil is sour crude, which is purchased at a price less than sweet crude. The spread between sour crude oil and sweet crude oil increased 30% in 2005. This helped Valero post net income of $3.6 billion, which was double the previous year's $1.8 billion.

Valero's return on equity is more than 31% and its forward P/E multiple just 7.6, meaning the stock remains cheap. Furthermore, as I write every time I mention energy stocks: Nothing has changed since last year in terms of supply and demand; we are just starting the year with higher oil prices. Until supply and demand are addressed, what worked last year will work continue to work.

While margins most likely will not stay this high throughout the year, Valero will continue to make record profits.

Finally, shares of both Patterson-UTI Energy and Bronco Drilling have dropped since I recommended them two weeks ago. I still own both stocks and am looking to buy more shares. Both land drillers have increasing rig utilization regardless of whether oil prices have been up or down. I believe both are bargains here.

Remember, being poor is bad; staying that way is stupid.