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Politics : Welcome to Slider's Dugout
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To: RWS who wrote (9238)4/15/2008 3:11:56 PM
From: jim_p   of 50749
 
Based on historical earnings it looks pretty cheap, but refining is probably the most difficult of any business to forecast earnings on which is why they tend to sell close to book value and at very low PE's. You can have large swings in the earnings depending on the crack spread.

The higher oil prices and high gasoline inventories are also putting pressure on the crack spread and people are expecting a reduction in the summer driving this year due to higher oil prices and the recession. As a rule the crack spread increases during the summer driving months, but with the economy slowing and gasoline inventories increasing I wouldn’t expect very good margins this summer.

Based on historical crack spreads gasoline should be selling for $4.00 a gallon today, but it’s a lot lower in most parts of the country.

The other issue is they require an incredible amount of credit to finance the inventory and letters of credit to purchase the oil and banks are cutting back on credit and Western is on credit watch for a possible downgrade.

There is a good reason why nobody has wanted to build new refineries over the past decades. When the business is good it can be very good and when it’s bad it can be very bad.

Many years ago when I was an oil and gas banker I handled all of the refinery credits in our bank because they were considered very high risk.
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