NEW YORK (TheStreet) -- Opportunistic oil refiners such as HollyFrontier (HFC) thrive or thirst based on the spread between the price of West Texas Intermediate (WTI) oil and the international Brent crude price. The wider the spread, the more money it can make.
The investment theme in this article concerns how refiners like HollyFrontier make maximum profits. When there's a glut of oil, as there is for the moment, HollyFrontier can buy it for $90 a barrel and then sell the refined products it creates at international prices, making a small fortune with each transaction.
As Cramer points out, right now, WTI is selling for a discount of $10 to Brent, or $98 vs. $108, and then oil from the Permian basin "is selling at an additional $8 decline to the $98 price [of WTI] as Permian producers duke it out for pipeline space and take discounts galore to do so."
This is a field-day for the companies that own the pipelines and for refiners who take advantage of the situation in the Permian basin. Since HollyFrontier can buy Permian oil directly, it's in line to directly benefit. Right now its shares are down 1.5% for the year to date as of the Thursday close of $49.
As an independent U.S. refiner the company uses the discounted oil to produce high-value refined products such as gasoline, diesel fuel, jet fuel, specialty lubricant products, liquid petroleum gas, fuel oil and specialty, modified asphalt.
With a refining capacity of approximately 443,000 barrels per day in refineries located in El Dorado, Kansas, Tulsa, Oklahoma, Artesia, New Mexico, Cheyenne, Wyoming, and Woods Cross, Utah, the company is strategically located to take advantage of this chance to buy low, refine efficiently and sell at profitable prices to its broad customer base.
HollyFrontier offers its products to other refiners, convenience store chains, independent marketers, retailers, truck stop chains, wholesalers, railroads, government agencies, paving contractors and commercial-specialty markets, as well to airlines in the U.S. and abroad.
No wonder shares moved over 13% higher between March 3 and March 12. Now, as the one-year chart below illustrates, shares of both HollyFrontier and Marathon Petroleum are correcting. This may set the stage for another buying opportunity.
My suggestion is to wait a while longer before buying shares of either HFC or MPC. There's still too much uncertainty about how oil prices will behave. Since HollyFrontier's share price was as low as $44.30 on March 4 and soared to $50.12 on March 12, it's possible shares may retrace half of that move.
This would allow investors to buy HollyFrontier on dips to a price closer to $47. At that level the dividend yield would be closer to 2.55%. Or, buy a little now and buy more if and when the stock goes lower.
The glut of Permian oil is likely to continue another three months as no new pipelines are scheduled to open until June. No wonder Cramer and I are both excited about this short-term window of opportunity.
From a fundamental perspective, the analysts' estimates for refiners like HollyFronteir are too low because they don't factor in this Permian discount to the WTI oil price discount. Analysts can't see every opportunity before it develops, but at the present time it's safe to agree with Cramer that there are "...three more months of wide spreads and three more months of outsize profits" for refiners like the ones mentioned in this article.
At the time of publication the author had positions in MPC, but in none of the other stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.