This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Cracking Open Two Magic Formula Oil Refiners

NEW YORK ( -- Oil refining has not historically been considered a business with particularly attractive returns on capital, but recent conditions in the oil markets have led to highly desirable conditions for two refiners in particular, HollyFrontier (HFC - Get Report) and Western Refining (WNR - Get Report).

As a result, and of investors not sold on the longevity of those favorable conditions, both stocks are currently a part of the Magic Formula® Investing (MFI) "universe."

Let's take a look at the business, why the going is good at present, whether it can last, and which of these two players is the more attractive choice for investors intrigued by the story.

Oil Refining: The Quick and Dirty

Refining is a relatively simple business to understand. Crude oil pumped out of the ground by exploration and production firms (E&Ps) is then transported to refineries, usually via a network of pipelines and storage terminals. There, crude is heated to separate, or "crack," it into the industrial end products sold by the refiners: gasoline, diesel, jet fuel, asphalt, motor oil, lubricants and so forth.

The profits earned by the refiners are the difference between the prices they can obtain crude at and the prices they can sell their end products for. In the industry this is sometimes referred to as the "crack spread."

Given the volatility of crude oil prices and less volatile nature of end-product selling prices, refining can be quite an up and down business, with dramatic peaks and valleys in profitability. In general, though, this is a historically low-margin business. Even the most well-run refiners only earn operating margins of 2% to 3% over the long run, and returns on capital struggle to exceed 10%.

The Flavors of Crude

There are actually over 160 different types of crude oil, but the two that are traded on commodity markets are West Texas Intermediate, or WTI, and Brent. WTI is produced mainly in North America, while Brent is imported. Historically, these two types of crude have been priced fairly close to each other.

However, this has changed dramatically over the past year and a half. Huge production increases in North America, due mainly to shale fracking, have brought a tremendous amount of WTI crude into the system, more than the existing refining, pipeline and storage terminal system can efficiently process.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
HFC $49.24 -2.03%
WNR $44.74 -3.81%
AAPL $111.79 0.17%
FB $94.12 -0.15%
GOOG $652.30 0.87%


Chart of I:DJI
DOW 17,081.89 -49.97 -0.29%
S&P 500 2,014.89 +15.91 0.80%
NASDAQ 4,796.6090 -42.0340 -0.87%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs