As Oil Prices Rally, Time to Buy Energy?

by Louis Navellier | February 22, 2012 6:30 am

It’s happening again.

Last year, it was supply disruptions from Libya. Now, it’s the drama in Iran that’s doing a number on global crude oil and gasoline prices[1].

Last week, the Iranian government announced that it’s halting oil shipments to six European countries. This drove Brent crude above $120 per barrel and represents the highest level for that benchmark in nearly nine months.

On Tuesday, U.S. futures for the sweeter West Texas Intermediate (WTI) hit $105, which also the highest price for WTI in nine months. In fact, executives at Citizens for Affordable Energy expect to see WTI reach $130 per barrel[2] by the end of next summer.

Of course, this translates into higher gas prices[3] at the pump. According to the Energy Information Administration, gas prices have jumped 29 cents since December. And, this may affect American consumers’ behavior[4] as they make decisions on things like vacations and upgrading their existing cars.

Airline stocks sold off 10% on Tuesday because investors know that jet fuel is the biggest expense for airlines — and when fuel prices rise, airline profits fall. But, this is just one impact of higher fuel costs. There could be economic implications as well.

The fact that light, sweet crude oil is now back at the same price as during last year’s civil war in Libya means economic growth will be curtailed in Europe, since it depends predominately on light, sweet Brent crude oil. Fortunately, the impact of higher energy prices in the U.S. is less severe than in Europe and won’t necessarily derail the U.S. economy.

However, for us investors, there is a silver lining: This is a great time to invest in refineries, especially those that deal with WTI in the Midwest. If Brent prices rise faster than WTI prices, this increases the bottom line for Midwest refineries. That’s because they price their products based on Brent, but ultimately have their costs tied to WTI. Let’s take a look at some of the main refineries and see what their prospects are.

I’ll highlight two Midwest refineries. They aren’t the largest players in the energy industry, but they still pack a punch.

The first is CVR Energy (NYSE:CVI[5]), whose roots extend back more than 100 years. In addition to focusing on clean transportation fuel, the company has also expanded its operations to produce nitrogen fertilizer products. What’s neat about the two operations is that CVR takes the petroleum coke produced by its refinery and uses it to make its nitrogen fertilizer. CVR is the only producer in North America that uses this process.

And it’s no lightweight. Between the two divisions, CVR brought in over $4 billion in sales last year. This company is slated to announce earnings on Monday, Feb. 27, and its prospects are stunning. Currently, the Street expects CVR to expand earnings by 171%, more than triple the estimate for the rest of the Oil & Gas Refining & Marketing Industry. No wonder that last week the company attracted the attention of activist investor Carl Icahn, who made a $2.6 billion tender offer of $30 per share of CVI.

I also have my eye on Tesoro (NYSE:TSO[6]), an independent oil refiner and marketer that operates seven refineries in six states, including one in Alaska and one in Hawaii. When Tesoro’s production is at maximum capacity, the company can refine 665,000 barrels per day. The end result is gasoline, jet fuel, diesel fuel, liquid asphalt and other fuel products.

Tesoro has made a series of smart acquisitions over the last few years, and it couldn’t have timed its growth efforts better. It has ramped up production capabilities and market reach just in time for the current price surge. In the most recent quarter, the refiner boasted 40% sales growth, topping the consensus estimate by 41%. And, thanks to improved operational efficiency and effectiveness, Tesoro posted the best full-year results since 2007. TSO is right in the sweet spot of the oil market.

Let’s see how these two refineries stack up against the country’s largest energy players. Remember, I consider only A- and B-rated stocks as buys. If a stock has a total score of C or lower, it’s best to hold off.

Ticker Company Name Barrels Per Day* Fundamental Score Quantitative Score Total Score
NYSE:BP[7] BP 1,302,350 B C C
NYSE:COP[8] Conoco Philips 1,787,000 B C C
NYSE:CVI[5] CVR Energy 115,700 B A A
NYSE:CVX[9] Chevron 1,027,271 B B B
NYSE:HFC[10] HollyFrontier 285,350 B B B
NYSE:RDS.A[11] Royal Dutch Shell 436,400 B B B
NYSE:SUN[12] Sunoco 673,000 D B C
NYSE:TSO[6] Tesoro 657,300 B B B
NYSE:VLO[13] Valero Energy 1,682,300 B D C
NYSE:XOM[14] Exxon Mobil 1,855,240 B C C

* Daily output information from U.S. Energy Information Administration

Endnotes:
  1. crude oil and gasoline prices: http://investorplace.com/2012/02/5-reasons-well-see-4-gas-by-memorial-day/
  2. expect to see WTI reach $130 per barrel: http://www.bloomberg.com/news/2012-02-21/wti-crude-oil-may-reach-130-a-barrel-hofmeister-says-1-.html
  3. higher gas prices: http://investorplace.com/2012/02/4-easy-ways-to-save-on-gas-xom-bp-aapl-goog-yhoo/
  4. affect American consumers’ behavior: http://investorplace.com/2012/02/surging-gas-prices-can-stall-the-recovery/
  5. CVI: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVI
  6. TSO: http://studio-5.financialcontent.com/investplace/quote?Symbol=TSO
  7. BP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BP
  8. COP: http://studio-5.financialcontent.com/investplace/quote?Symbol=COP
  9. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  10. HFC: http://studio-5.financialcontent.com/investplace/quote?Symbol=HFC
  11. RDS.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS.A
  12. SUN: http://studio-5.financialcontent.com/investplace/quote?Symbol=SUN
  13. VLO: http://studio-5.financialcontent.com/investplace/quote?Symbol=VLO
  14. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM

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