If you’re a producer of crude oil, odds are you’re not doing so well these days. As oil prices continue drifting lower, thanks to an omnipresent imbalance in supply and demand, investors’ profits in energy stocks haven’t exactly been fat or, in some cases, existent. Energy producers just aren’t cutting it.
If you’re an energy firm located in the downstream or refining sector, however, these are the times you kill for. As oil prices have plunged by roughly 65% since last summer, refining stocks are feasting on low feedstock and input costs. Making some sweet profits for the downstream players.
Which makes the timing of the new Market Vectors Oil Refiners ETF (CRAK) impeccable.
Cute ticker aside, the new CRAK ETF could be one of the biggest buys as crude oil continues to drift along and production-focused energy stocks falter.
The Appeal of CRAK
The CRAK ETF couldn’t have come at a better time. Downstream sector profits are all about the difference between crude oil costs vs. what they can charge for refined products.
For most refiners, these oil inputs are priced in light sweet West Texas Intermediate oil or heavy sour Western Canadian Select crude oil benchmarks. On the other hand, gasoline pump prices — as well as prices for other refined products — are generally based on the price of Brent crude.
That difference between the feedstock cost and final product selling price is called the crack spread.
The often quoted and famous 3:2:1 crack spread refers to turning three barrels of crude oil into two barrels of gasoline and one of heating oil. It varies based on the exact inputs and what kind of refined product is produced, but the general principal is price: What goes in vs. the price of what comes out.
With the recent implosion in WTI — which saw WCS fall even further — and the likelihood of further volatility in the market, those crack spreads are getting larger and juicer for downstream energy stocks. Basically, this means that refiners are going to be making more money turning crude oil into processed products.
Even more, when you consider that prices for natural gas — which is used to power cracking facilities and refineries — is running at new lows as well. That’s awesome news for investors looking to actually make some coin from energy stocks in this low-priced environment.
Already, this has come true. Over the last year, refining and marketing stocks are the only sub-segment of the energy sector which has posted a positive return (13.7%). Every sub-sector has registered a negative total return. With that in mind, CRAK could one of the best ETFs for the energy sector this year.
Taking a Look at CRAK
CRAK represents the first ETF to offer pure-play exposure to global oil refiners. Van Eck uses self-indexing for its suite of Market Vector’s funds and CRAK is no different. The underlying index tracks the performance of the largest and most liquid companies in the global oil refining segment. To be included in CRAK, constituents must generate at least 50% of their revenues from crude oil refining and meet certain size and liquidity requirements.
Of CRAK’s 26 holdings, the top names should sound very familiar. Downstream industry stalwarts Marathon Petroleum (MPC), Phillips 66 (PSX), Valero Energy (VLO), HollyFrontier (HFC) and Tesoro (TSO) are all included in the ETFs top ten. These, plus a few more American names, make up around 48% of CRAK’s total assets.
But CRAK is a global fund. The remaining 18 holdings are a sampling of the world’s largest refiners. This includes some from far-off locals like Thailand and Poland. And Japan and India get the nod as the next two largest countries in terms of assets.
That does mean that CRAK does come with some currency risk as well as the fact that some international refiners use Brent crude as their feedstock. But with 65% of the ETFs assets in the top ten holdings and the vast bulk of them as American as apple pie, these effects should be muted.
Expenses for CRAK will run 0.64% — $64 per $10,000 invested. Van Eck, however, has agreed to cap the expenses at 0.59% until May 1, 2017 to garner interest in the new ETF.
Should You Buy CRAK?
So is the new CRAK ETF from Van Eck worth your hard-earned dollars? The answer is yes, with a big asterisk.
Ultimately, CRAK makes a great play to balance out a portfolio heavy with production names. You basically can create your own “integrated” energy stocks portfolio. In environments like today, CRAK and its refiners should outperform.
In a period of rising crude oil prices, it’s the other way around. With oil so low and perhaps staying this low for quite a long time, CRAK could be the balance and source of returns that investor’s need.
The big asterisk that comes with CRAK is that the fund is new, so it hasn’t garnered any significant assets or trading volume yet. CRAK only has about $1.8 million in total assets and trades about 8,000 share per day since launching in mid-August.
That low asset count and share volume means the fund needs prove itself to investors. Over time, those two metrics should improve, but in the meantime, it could mean higher costs for investors and a premium on CRAK’s net asset value.
The best advice for CRAK would be to place it on a watch list and wait for the trading volume to pick-up. But when it does, CRAK could serve an investor’s portfolio very well.
As of this writing, Aaron Levitt was long MPC.