10:09 FT discusses US oil refiners
FT reports petrol is ever more expensive, but US refining stocks look cheap. At 8 times 2008 earnings, the sector trades close to historic trough levels. The reason? Even though the price of refined products such as petrol has risen, the cost of crude oil has surged even faster, squeezing refiners' margins. Refining bulls forecast a bounce in margins, citing the fact that gasoline inventories have fallen by 9% since early March.
Such a view is hard to square with the broader picture, though. Inventories are still far above the seasonal norm. The recent decline is not due to a spike in demand, but rather cuts in capacity. The economic slowdown appears to be subduing oil consumption. Meanwhile, government-subsidised ethanol is displacing petrol demand at the margin. On the input side, non-domestic factors such as rising Chinese demand help to keep crude expensive.
Beyond 2008, there is a further threat to the sector in the shape of new refineries. Refining's recent renaissance stemmed from global demand finally catching up with surplus capacity. Lehman Brothers, however, estimates basic capacity will expand by about 9m barrels per day over the next three years -- roughly three times the rate of demand growth.
One comforting factor is that most of those new plants will be built in Asia. Since it remains very difficult to site new refineries in North America, existing assets enjoy a scarcity premium. PBR, for example, has expressed interest in Valero Energy's plant on the Caribbean island of Aruba. Blackstone is also on the prowl for refineries. Even Kirk Kerkorian, whose $64-a-share offer for 16% of TSO failed last year, might be tempted back in now that the stock trades at $27. Banking on merger activity to lift a sector is risky. But with few other positive catalysts out there, it may be investors' best hope for a rally. |
