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Will Oil Refineries Suffer From the Drop in the Brent-WTI Spread?

NEW YORK (TheStreet) -- Leading U.S refineries haven't done well in the stock market in the past few months. For one, the drop in the spread between Brent oil and West Texas Intermediate could drag down these companies' profit margins in the near term. But is there a cause to worry? Let's take a closer look at two U.S oil refineries Valero Energy (VLO - Get Report) and Marathon Petroleum (MPC) and see the impact the lower difference between the price of Brent and WTI had on their profit margins in the past quarter.

During the past quarter, the difference between the price of WTI oil and Brent oil contracted to range between $3 per barrel and $8 per barrel. The average was $6.73 during the past quarter. Back in the second quarter of 2013 the spread was around $5 and $14 per barrel and the average at $9.23. This spread even topped, at one point in 2013, the $20 mark due to the looser U.S oil market relative to the European market. But in the past several months the two oil markets have started to close the gap, which brought down the Brent-WTI spread.

Tuesday, Valero Energy came down by 1.36% to $49.73 per share and plummeted by 14.7% since the beginning of May. Marathon Petroleum rallied 0.66% to $85.03. Despite this recent gain, the company's stock is down 11.4% in the past three months.

The impact of the low margin between Brent and WTI varies among refineries as some of them rely more on the Brent-WTI margin compared to other refineries. Nonetheless, during the second quarter, both Valero Energy and Marathon Petroleum improved their profit margin. For Valero Energy the higher profit margin was because of better spreads on certain light and sour oils compared to Brent crude oil. For Marathon Petroleum the improved margin was due to higher spread on its Gulf coast oils. These higher discounts offset the negative impact the lower Brent-WTI had on these companies' bottom line.

Looking forward, if the spread between Brent and WTI keeps coming down (if the oil market in Europe loosens (Brent oil) compared to the U.S oil market (WTI oil)), it could curb down the recent rise in these companies' profit margin.

At the time of publication the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

At the time of publication, the author held no positions in any of the stocks mentioned.

TheStreet Ratings team rates VALERO ENERGY CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate VALERO ENERGY CORP (VLO) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, attractive valuation levels, solid stock price performance and growth in earnings per share. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • VLO's revenue growth has slightly outpaced the industry average of 1.5%. Since the same quarter one year prior, revenues slightly increased by 2.6%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • VLO's debt-to-equity ratio is very low at 0.29 and is currently below that of the industry average, implying that there has been very successful management of debt levels.
  • Powered by its strong earnings growth of 45.23% and other important driving factors, this stock has surged by 42.01% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, VLO should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • VALERO ENERGY CORP has improved earnings per share by 45.2% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, VALERO ENERGY CORP increased its bottom line by earning $4.97 versus $3.75 in the prior year. This year, the market expects an improvement in earnings ($5.62 versus $4.97).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income increased by 26.2% when compared to the same quarter one year prior, rising from $466.00 million to $588.00 million.

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