Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's Daniel Dicker joined NBR Tuesday (watch video and read transcript here) to discuss which oil and refining companies are positioned to profit as commodity prices climb.
Refining: It's the only sector, in energy or elsewhere, that is not just immune to rising commodity costs, but poised to benefit from them.
For dedicated refining stocks and integrated energy stocks with exposure to refining, that's a tremendous advantage, especially as we get deeper into first-quarter earnings. In a market that has been testing our ability to find value, these stocks represent the best opportunities in energy right now.
As our "Teflon" market grinds higher, the one big analyst concern for stocks has been margin compression from the monster moves in all commodities -- in corn, beans, cotton, copper and, most notably, oil.
One group that will obviously benefit from higher oil prices is the large integrated oil stocks, like
. But less obvious beneficiaries are refining stocks, including
One big reason refiners are doing especially well is the continuing disconnect between the price of West Texas Intermediate (WTI) crude, traded at the NYMEX, and the price of Brent crude, traded at the Intercontinental Exchange (ICE).
It's a complex relationship and difficult to explain in a short column, but think of it this way: Imagine that the input costs of a refinery are represented by the WTI price, while the Brent price better reflects what the companies can charge consumers at the pump. Therefore, the further the price of Brent crude climbs above WTI, the better the margins and bigger the profits oil refiners will see.
This spread between Brent crude and WTI has been at a historic premium for the last several months. What is more spectacular, though, is that it has begun to increase again in the last few days, and is now at almost $14. That's about as close to a license to steal as the refiners can get, and they absolutely mint money in a relationship like this.
The refiners I mentioned earlier have run substantially already on the basis of this continuing disconnect, but there is one more that might just be the best:
. Their refining assets in the mid-continent region of the U.S. are the best poised to maximize margins from the WTI/Brent spread. Their soon-to-be-merger partner
offers the same trade in a slightly different form.
The price action of the refiners has left analysts and the market expecting big results from first-quarter earnings reports. Where the surprise might have so far traveled under the radar is with the big integrated oil stocks and their refining divisions.
While unable to capture quite as well the margin disconnect of the dedicated refiners, big oil companies are still poised to deliver tremendous profits from their downstream divisions -- which have been their biggest laggard to earnings in the last 12 quarters. This turnaround, as far as I can tell, will be a major surprise for both analysts and the street, and should lead to a big pop for the stocks. With less than three weeks to go before Exxon, Conoco and Chevron -- as well as a host of others -- start to post first-quarter earnings, it may be time to load up in front of these reports.
Refining is one of the few sectors that has actually benefited from the big move up in oil prices. Take advantage with the integrated and dedicated refining stocks.