The last time crack spreads were this high was 2007. However, keep in mind, there wasn’t an egregiously wide Brent/WTI spread like today. So, in many respects, today’s environment is better for the refiners, providing the whole house of cards thingy holds together. At any rate, one of the things I like to do is look at maximum earnings power during peak cycles. Looking back in time, when a certain industry is at its peak, can really tell you a lot—providing you believe history is about to repeat itself.
So, I gathered and combined all the 2007 EPS numbers for VLO, WNR, HOC, FTO, ALJ, DK and TSO. I did the same thing with share prices and derived at a group PE.
2007 combined share price (refiners): $280.53
-combined EPS: $28.43
-combined PE: 9.86
Now, here comes the tricky part. If history is really about to repeat itself, the current analyst estimates are garbage, utterly useless when trying to determine a fair price. So, to placate my inner demons, I took the high end estimates for 2012, even though they may prove to be too conservative. Here are the results.
Combined current share price: $185.73
-high end estimates, 2012: $25.22
-current FPE: 7.36
Naturally, there is much more to the value of a stock than EPS. One needs to consider macro events, as well as buyout premiums. However, one thing is for certain: if current spreads sustain for a lengthy period of time, analyst estimates are going way the fuck up, in order to catch up with reality. Based upon past history, the refiners are at least 30% undervalued, at current prices—in my opinion of course.
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By cracky!
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Let’s go WNR…today’s down day was unacceptable! Haha…in it to win it..FIG
Cool new data. We can now figure the crack spread between the number of page views/number of comments.
Yes
It’s widening too.
Another way to measure a crack spread is the number of digits that can be placed between gluteal muscles
now this sir is hilarious to the tilt
I’m a little apprehensive about it but what exactly pops up when you Google “crack spread”?
Nothing nearly as bad as google imaging “harlequin disease”.
not sleeping tonight
Check out the chart on page 10 of gross margin performance of refiners from 2007 to present, care of WNR. With their El Paso site shut down for that short period in February which affected the stock, and as long as they can push capacity utilization and get volume ramping, both sites (El Paso and Four Corners) should produce some of the best combined present margins. Four Corners is the new Five Points and Cushing is the new Cutting.
And this time around, real demand is not that much of an issue…unless your in a Gas Line in Toyoko.
For Airlines…China looks like it will be cutting Fuel Charges http://www.china.org.cn/business/2011-03/29/content_22244485.htm
Fly,
thanks for the workup on that, I was beginning to wonder myself given the current crack spread vs 2007
any thoughts on what a squeeze on the WTI/Brent spread would do?
jimmy
http://www.washingtonsblog.com/2011/03/war-in-libya-its-really-about-broccoli.html
The coalition involvement in Libya is really about Broccoli !
With Japan losing as much refinery capacity as it has, it is logical to believe that existing refineries would prosper. Unfortunately, a rigged stock market is not necessarily subject to logic or the laws of supply and demand.
T3Live.com – the Morning Call – mentioned WNR and VLO. – I don’t have a very big position so I don’t really give a shit.
For this to work you need to be right about the loss of refining capacity in Japan being the biggest capacity because as crude futures move into backwardation this is usually a drag on the crack spread.
I don’t see the WTI-Brent spread staying this high, if the Libya conflict drags out (which it looks like it will) then the shortage is in light sweet and European refineries set up for Libyan crude cannot easily switch to more sour grades.
You have nailed this so far so Im watching with interest
The projected spread is only $5 between Brent and wti. Right now it is $14.
Yeah I agree, I would not be surprised if WTI went back to trading at a premium even
Oh no way. I believe spreads will remain north of 10
” the loss of refining capacity in Japan being the biggest capacity”
What does that mean?