Fitch Ratings Looks at Refiners (VLO, FTO, TSO)

Fitch Ratings published a short report on the effect of the compression in crude oil spreads on refiners. We looked at this phenomenon about a month ago. Fitch concludes that the “relative cost advantage of higher complexity refiners”, that is, those that process heavy, sour crudes, “has been muted relative to less flexible sweet light peers.”  If the heavy sour crudes are not discounted relative to light, sweet WTI, refiners such as Valero Energy Corp. (NYSE:VLO), Frontier Oil Corporation (NYSE:FTO), and Tesoro Corporation (NYSE:TSO) face a period of “underperformance.”

According to Fitch, “Despite the near-term decline in crude oil spreads, Fitch views heavy and sour conversion capacity as a key long-term competitive advantage in the refining sector.”

Valero is trading up more than 3% in the pre-open market, and Tesoro is up more than 10%. Frontier, which was downgraded from ‘Buy’ to ‘Hold’ by Argus on Friday, has seen no action yet this morning.

Paul Ausick
March 23, 2009