Crack is Dead Too

Anyone who’s been reading me for more than two years knows that I was first to be bullish on the refiners, before all of the fancy men with bowed and floral ties rated them to be “buys” on the teevee box. I was long the WNR when it was a limp adolescent, fixed in a price range of $11 to $17.

Now that the WNR has grown, paid off debts, and become a mature investment, plebs recommend it still. However, hidden in plain view is a significant deterioration of profit margins for the refiners.

321 crack spreads are down from mid 30’s to mid 20’s.

And the spread between WTI and Brent crude is down from 25 to 14.

Ignore these trends at your own peril. The primary reason to be long any mid continent refiner is the WTI-Brent crude spread. Without delving into details, it’s their license to steal from you.

There’s also a reason why refiners, like the metals, are traditionally clad with low PE multiples. They are a classic boom to bust back to boom cycle sector. There isn’t any long term profitability worth banking on in the refinery sector. Once margins turn lower, they tend to exaggerate and crush the equities of the underlying businesses.

The primary impediment to shorting these stocks now are their strategic importance. The big oil and gas companies will not buy them. They’ve been selling their refinery businesses for years. But these bozos will most likely merge with one another, just before the industry blows up. So if you’re short the sector, don’t be surprised of a monday morning rape, with your short +35% on a buyout offer.

Nonetheless, I think the sector should be avoided.

Here are the richest valued refiners, ranked by FPEs.

ALJ
CLMT
CVI
DK
PSX
WNR
TSO
HFC
MPC
VLO

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