Has anyone noticed the divergence between the crack spread and the share price of VLO and TSO? I had always assumed that the two would be correlated. This doesn't seem to be the case. Are these equities undervalued?
Here they are relative to the S&P. Until recently they had both underperformed the S&P over the last 6 months. TSO has bounced back over the last couple of weeks but VLO has still underperformed. I think they both look cheap relative to the rise in the crack spread over the last 6 months. I guess the trade would be to buy VLO and TSO and sell the S&P. Am I missing something here?
They do look good. The thing is that these refiners have hedged their profits away. Check out some earnings reports. Especially WNR. Their profits should have gone up 30%+, but they were hedged all the way. And they have been using their profits to pay off debt. Which is a good thing in the long run. They are cheap, but also a lot of economic downside is being priced into these stocks. But nonetheless they are undervalued IMO. I'm long WNR. BTW, David Tepper has taken big stakes in VLO, CVI and WNR. -SL
"Their profits should have gone up 30%+, but they were hedged all the way" Ah, there you go. I knew I was missing something.
traders get in a lot of trouble trading based on what they think should happen than what is actually happening. if the crack spread is trending up buy the crack spread, period. if it breaks the uptrend, exit or short.
The problem with this analysis is that the WTI crack spread does not represent the actual margins of VLO. East Coast refineries buy their oil priced closer to Brent Crude, which is much more expensive than WTI. The brent/RBOB/HO crack is still pretty good, but not nearly as wide as WTI. Look at VLOs or TSOs quarterly earnings releases. They give you their actual refinery margins for each region.
I've had a look at the accounts for WNR - interesting stuff. Net Sales in 2010 were $8m which included $9m losses from hedging. Net Sales in 2009 were $7m which included $20m losses from hedging. Net Sales in 2008 were $10m which included $11m profits from hedging. Previous years show a similar picture. I had no idea that the profits / losses from hedging for refineries was so large relative to their revenues. If it is the case that changes in the crack spread have largely been hedged by these refineries then what makes them relatively cheap at the moment?