Refineries Try Shaking Higher Oil Prices (VLO, HES, SON, TSO)

It is hard to not notice the $1.70 gain in WTI NYMEX Crude to over $86.50 per barrel this morning.  This is on the heels of new reports of economic recovery after last week’s gains in non-Farm Payrolls.  It is also days after OPEC and non-OPEC oil ministers argued that $70 to $80 would be a fair range for the price of oil for years.  Higher and higher oil prices are good for those who drill oil, but the refinery sector gets squeezed by higher and higher oil prices.  It cannot pass on the rise, and oil rising each day generates higher and higher operational costs.  We have noted on several occasions how refining capacity has picked back up over 80% after spending a brief time under the 80% capacity level.

We wanted to see how this was first affecting Valero Energy Corp. (NYSE: VLO), as well as Hess Corporation (NYSE: HES) and Sunoco Inc. (NYSE: SUN).  Lastly, it is hard to not notice how Tesoro Corporation (NYSE: TSO) is not participating today.

Valero has been facing lower refining margins and has pared down its portfolio of lower margin operations.  The economic downturn hit it harder than others.  Valero had a share price north of $60 and then even north of $70 during the peak oil craze in 2008.  The company continues on restructuring and moving back toward consistent profitability, but the most obvious effect on business is that large swings in the price of oil make it harder and harder to manage profitability.  Thomson Reuters is calling for $1.06 EPS in 2010.  Its shares are up 2% at $20.42 today.

Hess has effectively remained profitable and its stock has not been punished the same as Valero and its market cap is now north of $20 billion with shares up over 1% at $64.35 today.  While it may be the best here in refining, its stock is still down 50% from the 2008 highs north of $130 for a share.

Sunoco has a market cap of barely $3 billion.  It faced some of the same profitability issues of losses as Valero did, but its stock highs around $45 in 2007 are far less bad in comparison to Valero with its shares flat today at $31.68.

Tesoro is the one we consider the baby and its stock has more than doubled off its lows.  The difference between this and Valero is that the stock was performing even worse than Valero as it sold off almost 90% from the highs.  It also shared in an annual earnings loss for 2009, and the earnings expectations for 2010 are barely profitable at $0.02 EPS for the year.  An explosion at Tesoro’s Anacortes, Washington refinery along with an analyst downgrade (Cut to Hold at Deutsche Bank) is making this the piglet of the sector today as a 5.7% drop has Tesoro down to $13.58 on more than 133% of normal trading volume at 12:30 PM EST.

JON C. OGG