Sometimes, markets overreact to news.
In this case, we’re talking about the recent landmark decision by the Obama administration to begin the early stages of exporting our crude oil bounty overseas.
The news was heralded by various energy firms — especially those in the Bakken and Eagle Ford producing regions of country. After all, those exports should help West Texas Intermediate (WTI) benchmarked crude increase in price and trade closer to international benchmark Brent. That means some hefty profits for those firms drilling within our borders.
Sadly, that’s not necessarily a great thing if you operate a refiner and use WTI as a cheap feedstock for your gasoline, jet fuel and other products. As such, shares of leading refining stocks like Valero (VLO) and Marathon (MPC) fell hard on the news.
Perhaps too hard.
For investors looking for a beaten-down value in the energy sector, downstream players could be one of the best bets at current fire-sale prices.
Last week, the Obama Administration and the Commerce Department paved the way for U.S. oil exports. In a landmark decision, government officials gave Pioneer Natural Resources (PXD) the go-ahead to begin exporting a type of light oil known as condensate. The byproduct of natural gas drilling, condensate is considered a type of oil and is actually a mixture of various hydrocarbons, including everything from more traditional natural gas liquids (NGLs) to ingredients resembling gasoline or “drip gas.” A big and growing use is mixing it will heavy oil sands-style oil in order for it to be shipped through pipelines.
That makes it a very useful and profitable product for energy firms. And we’re producing a ton of it now, thanks in part to fracking.
The key for PXD and partner Enterprise Product Partners (EPD) is that, according to the Commence Department, condensate fits the bill as a “refined” product for export. That’s because it needs to go through a series of stabilizers during the gathering process in order to be used. Even though that process is really just one or two steps, it still makes condensate a “refined” product and eligible for export under current rules.
Several analysts has postulated that this is just the first step to lifting the 40-year ban on exporting straight crude oil exports. And that’s bad news if you rely on cheap mid-continent crude as your main profit driver. So it’s no wonder why shares of the refining stocks plunged on the news. VLO dipped 8.3%, MPC dropped 6.3% and PBF Energy (PBF) plunged by 11%.
A Big Overreaction in Refining Stocks
The concern is rightfully there. After all, the sheer glut of crude oil here in America is allowing refining stocks to realize insane profits on their crack spread margins. So some drop is certainly warranted. But an 8%-plus plunge? I’m not so sure.
Here’s why that’s unwarranted …