VLO is looking very good.
the link below has a nice discussion on the refinery business and why this present boom might just last longer than most on wall street realize!
the-viewpoint.com
"Look Downstream for Profits energy
The energy business is known for its booms and busts. Today, the money is flowing at oil refiners. Even so, the good times can’t last. Or can they?…
New York City - October 1, 2001 - Sun up 36% for the year? That can’t be correct. Everybody knows that Sun Microsystems’ stock has collapsed. But enter S-U-N into any stock charting system and look at the graph: a steady rise since the beginning of 2000.
Ahhh. How many people have made the same mistake!? “SUN” is the symbol for Sunoco – a boring old oil refiner. SUNW is the famous Sun Microsystems.
Is it just a coincidence that while one sun was setting the other has been rising? Maybe. Even so, business at companies like Sunoco, as well as most oil refiners, has been on the rise for the past year. On a per share basis, Sunoco’s earnings have risen at an average pace of more than 200% annually for the past 4 quarters.
Refiners belong to the “downstream” part of the energy industry. “Upstream” players drill and pump oil from the ground, while downstream companies turn it into useful fuel, market the product, and distribute to end customers.
A basket of oil refining stocks - consisting of Sunoco (SUN), Frontier Oil (FTO), Valero Energy (VLO), and Ultramar Diamond Shamrock (UDS) - has been on a volatile path for the past 20 years – just like the industry. When the US economy was suffering in the 1970s, government subsidies encouraged a boom in construction of refineries. The oversupply lead to years of dismal returns, refinery shutdowns, and bankruptcies. Today, however, some analysts think the remaining players are ready to prosper in a new era.
Good Times have Arrived…
The reason for the renaissance is that US gasoline consumption steadily rose for two decades, while the excess refining capacity was being worked off. One indication that supply and demand have finally come into balance is the wide fluctuation in prices at the pump during the past year. Oil rose from below $13 per barrel in 1998 to surpass $37 last year. However, it was not until a bottleneck developed in the refining industry earlier this year that US gasoline prices shot up.
…But How Long Will the Party Last?
Investors are not yet convinced that the business upturn will continue. Even after the recent rise in share prices, P/E multiples are tiny, indicating investors have little faith in the sustainability of earnings. Ultramar Diamond Shamrock and Valero Energy both trade at less than 7x next year’s estimates, even though they are finalizing their merger, which will give the combined company a leading share in many local markets.
The big question for investors today is whether the industry is experiencing a normal cyclical upturn, which will end in collapse, or if a secular change is underway. The current economic slowdown should reveal the answer. If profits are still strong by the time the economy rebounds, investors might begin to love these dirty old companies and pay higher P/E multiples for the stocks." |
