Valero Energy Corp (VLO)

Refining doesn’t have anything to do with the price of oil, it has to do with crack spreads and refining margins. One of the things that has been absolutely killing refiners in the last 3-4 years is the RIN legislation of the Obama administration, requiring them to pay for renewable credit every time they produced gasoline and diesel fuel. The new administration is likely to change all that, and dramatically improve profitability. Dividend yield of 3.55%. (Analysts’ price target is $72.29.)

Every US refiner had to buy Renewable Energy Identification Number credits for its business and it destroyed their profitability. The new administration could be of a huge benefit to this industry. There have been 2 M&A deals in the refining industry in the last two weeks. (Analysts’ target: $66.88)

You should not be in it because it is not the right part of the cycle. It does better with declining oil prices. Also, it has had quite a run.

(Market Call Minute.) He doesn’t know where margins are going on the refining side. He thinks they are going to get squeezed a little given the rise in oil prices. It makes the earnings very volatile and you are not going to get a high valuation.

If you did a comparison against a broad index, this is weaker than the index. It had a corrective period in 2008 and has taken a long time to get back up. Also, the upward trend line has been violated.

(Market Call Minute.) Refiners have struggled a little lately. For him, on the energy patch as a whole, he would like to see a bit more time go by and a little more sustainability.

(A Top Pick Jan 8/16. Down 8.79%.) Had a huge downturn in Jan/Feb due to the pickup in gasoline production. The period of seasonal strength ends at the beginning of April.

(His Top Pick stocks are still holding up as of present, but the big warning is the systemic risk that is involved with the market.) There are very few stocks that are good in the energy sector. Where the supply of oil presently is, gives you about 29 days of supply, so there is a substantial supply. All this company is going to do is refine it, which is going to be a significant tailwind for them. He has a long-term trend line support starting at about $60. As long as that can be maintained, there is an average gain between the start of the year and the beginning of May of about 20.1%, and that has been positive in 21 of the past 25 periods.

He finds it too volatile for his clients. As oil prices have continued to decline and spreads for gasoline and diesel have continued to stay high, the profitability of a company like this has done really well.

Wouldn’t own this one here. It is a cyclical. His model price is $112, 84% over the last close of $60.83. You always get this in a cyclical. He would like to see it back at $15 again, and then he would be interested.

Crack spread is the spread between the crude and the underlying refined product price. VLO-N is an example of a pure refiner. A few weeks ago crack spreads reduced and the price went right down. Warren Buffet bought a refiner today, relatively close to the top.

Owned personally in the past, but it is too volatile for his clients. It has done well over the year and seasonally the demand is highest here. They don’t find or produce oil. They buy it and refine it and they own gas stations. It is a good company to own long term. Over two years the refiners could be the right place to be, but they will be more volatile.

Energy has a period of seasonal strength from January all the way through to May 9 on average, and this one has performed up to expectations. It is currently consolidating. We have the end of seasonal strength coming. If you are looking past the seasonality, you want to be into the refiners right now. From a seasonal play, he would recommend getting in right now, but from a longer-term perspective this is a place you want to be in the energy sector.

He is warm to it and owns it personally. Does not own it in client accounts because it is too volatile. Has the refining capacity to take heavy oil and refine it well. Thinks the price of oil will drop.

On and off he has liked the pure refining stocks, but for his own personal portfolio as it is a little risky for his clients. Even though they have tons of gas stations, what really moves this stock are the refining and marketing margins, which they make on each gallon of gas they sell. Refining margins depend on where West Texas prices are, where Brent North Sea prices are, and the spread between the 2. Also, if they are able to buy cheap Canadian oil this makes a big difference for them. When times are good that means they are getting the bigger spread.