Hell may have frozen over in the world of oil and gas.  Shares of oil refinery companies seem to have finally turned a corner.  In this aspect, we would be watching Valero Energy Corp. (NYSE: VLO) first, then Marathon Oil Corporation (NYSE: MRO), Sunoco Inc. (NYSE: SUN), Tesoro Corporation (NYSE: TSO), and Hess Corporation (NYSE: HES).

This week’s Department of Energy weekly data showed that refining capacity utilization rose by 3.1 points to 88.95%.  This was the highest seen since the peak of the energy bubble in 2008.  Dow Jones was expecting the rate to be effectively 85.9%, but we were going to be pleased with anything above 85%.  The American Petroleum Institute reported that refinery utilization rates actually fell by 0.4 points down to 84.7%, which was why we were more conservative than Dow Jones.

So far this week, we have seen Hess report an $87 million profit in its refining and marketing unit and Valero Energy Corp. (NYSE: VLO) report a $113 million net loss for its refining business.  Still, Valero said that even with low refining margins it still expects a 2010 profit.

What seems to be happening is that since oil prices are stable, refiners can properly manage their input costs against the prices of the refined goods they are pushing out of the refinery.  It is shocking to most of the public that refineries have done very poorly in comparison to those involved solely in exploration and production.

Back on April 15, 2010, Credit Suisse started coverage of the refining sector:

• Marathon Oil Corporation (NYSE: MRO) Started as Outperform.
• Sunoco Inc. (NYSE: SUN) Started as Outperform.
• Tesoro Corporation (NYSE: TSO) Started as Neutral.
• Valero Energy Corp. (NYSE: VLO) Started as Outperform.

On April 14, 2010, we noted that the DOE weekly refining capacity was really favoring refineries after a long period of struggle and this month we talked about a resurrection happening in the sector.

The big call in Valero was back on January 27, 2010, when we noted after its earnings that “Valero was finally worth a look” when shares were at $18.50.  After a run of 10% in the last 90 days, the implied upside of what happens when these businesses do finally turn around will historically leave much more upside if this continues.

The most interesting notion outside of the news is the charts.  After looking at six-month, one-year, and longer-term charts, there is a pennant or flag formation that is going to come into play over the next week or so.  If these shares hold here or trade up even a bit, it could be an ‘off to the races’ mentality from investors who have been patient and impatient as this has been the sole sector in energy without pricing power.

There are of course many caveats here.  Cap and trade is a big one, as are other regulatory hurdles.  Still, the U.S. cannot get off oil.  The U.S. just wants to get off of foreign oil dependence from a group of nations where much of the local population is anti-American.  There have been no new major refining operations approved in years, and remember this sector can’t lose money indefinitely.

Stay tuned.

JON C. OGG

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