A few weeks ago, billionaire activist investor Carl Icahn published an article in the Wall Street Journal that could have major implications for oil stocks PBF Energy Inc (NYSE:PBF), HollyFrontier Corp (NYSE:HFC) and CVR Refining LP (NYSE:CVRR). Icahn criticized the Renewable Fuels Standard created in 2005 to encourage the use of alternative fuels.
Carl Icahn has a friend in President-elect Donald Trump, and he may now have the political clout to make a major impact on the regulation of oil stocks.
Oil Stocks Ripped Off on RINs
According to Icahn, the problem centers on Renewable Identification Numbers. RINs are electronic credits created when oil companies blend ethanol and other renewable fuels with gasoline and diesel. Oil refiners must meet annual quotas for renewable fuel additions.
If they don’t meet the necessary requirement by adding renewables themselves, they must meet it by buying RINs from other companies that have exceeded their quotas.
Unfortunately, Carl Icahn says that Wall Street has infiltrated the RIN market and taken control. He argues this market is now filled with “manipulation, speculation and fraud.”
As a result of Wall Street’s involvement, the price of RINs has jumped from one cent in 2012 to nearly $1 in 2016.
What Does This Mean for Oil Stocks?
Carl Icahn believes the fate of smaller merchant oil refiners is closely tied to that of the U.S. economy.
“If merchant refiners go under, the Big Oil oligopolies will be strengthened and gasoline prices will go up, with ripple effects throughout the economy,” he wrote.
Large oil refiners and conglomerates blend their own biofuels, but smaller refiners simply sell their fuel to downstream blenders. These refiners are then forced to pay market price for RINs, which are getting more expensive by the day.
Many small merchant refiner oil stocks that would otherwise be enjoying a boom due to low crude prices are getting squeezed by the RIN mandate. Bloomberg reports that oil stocks such as PBF stock, HFC stock and CVRR stock will spend a combined $1.8 billion on compliance this year.
HollyFrontier will spend more than $415 million dollars on compliance in 2016, about 8% of its market cap. CVR Refining will spend roughly $220 million, about 17.1% of its market cap.
Finally, PBF Energy will spend roughly $800 million on RINs to gain compliance. That number represents a staggering 29.8% of the company’s market cap. Under that heavy of a regulatory burden, it’s not surprising that PBF stock is down more than 19% year-to-date.
Can Icahn Change the Law for Oil Stocks?
Carl Icahn may now have more political clout than investors realize. Following the release of the infamous Billy Bush recording, a number of high-profile Donald Trump supporters jumped ship. Carl Icahn didn’t. Regardless of how you feel about his politics, Trump is certainly loyal to his friends.
Trump already says reducing and eliminating regulations will be a big part of his presidency. Therefore, it might not take much arm twisting from Carl Icahn for Trump to make a push to eliminate the Renewable Fuels Standard all-together.
If Trump eliminates the RINs requirement, PBF stock could see annual cost savings of $8.13 per share. That would be huge for a stock that trades at around $30. HFC stock could see cost savings of $2.35 per share, and Icahn’s CVRR stock could theoretically save $1.49 per share.
If Trump ever utters the acronym “RINs” at any point in a policy speech, these three oil stocks could see major upside, and investors may have Carl Icahn to thank.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.