Fill The Tank With These Energy Stocks

It’s madness I tell you. Madness! I know. Oil prices are collapsing around us and I’m crazy enough to sit up here and talk about refiners. Before you get up at arms and start screaming about how ridiculous of an idea this is let’s take a closer look at exactly how refiners make their money.

Refiners take an input, crude oil, and process it into different petroleum product output including gas for your car, airplane fuel, kerosene and diesel. The differential between the price of crude and the petroleum products extracted from it is the refiner’s profit margin. So just as long as the price of the output products doesn’t fall as fast as the input price the refiners stand to profit.


Crack Spread

How many businesses do you know of that suffer when input costs drop? Now that’s not the only part of the equation for refiners. There is one negative for refiners right now stateside. The spread between West Texas Intermediate and Brent Crude. When Brent is more expensive then domestic refiners make money by taking lower input West Texas and producing output that can be sold for the same price as the higher input cost Brent crude derived products. When Brent becomes cheaper, then this benefit is no longer present. Today, West Texas briefly traded at a premium to Brent.





I’m not the only one with this wonky idea right now. Analysts have been raising their earnings estimates on many refiners over the last 60 days. As a matter of fact, the Oil Refining and Marketing industry is in the Top 38% of our Zacks Industry Rank with 7 stocks at a Zacks Rank #2 (Buy) or higher.


Tesoro Corp

Among these stocks is Tesoro Corp. Over the last 30 days, 6 analysts have increased their earnings estimates for the current quarter and the current year. This bullish attitude has helped raise consensus from 87 cents ninety days ago to the $1.30 level it stands at today for the current quarter. Numbers for the current year have shot up even more with consensus jumping from $5.31 to $6.80.

The stock price over the last couple of months has taken a hit. Most of 2014 was very bullish for Tesoro, as it was for the rest of the market. TSO rose from lows near $48 to a 52-week high of $79.49 in late November. However, as oil prices began to tumble TSO sold off as well. The stock came all the way down to a low of $64.16 this month.

When the stock hit that bottom in January you had stochastics oversold at 11.34 and the commodity channel index nearly at -200. As the stock bounced the stochastics have given us a bullish crossover and a buy signal the last couple of days with the CCI soon to follow. One major concern is the fact that the 25 day moving average shifted by 5 days still remains negatively sloped and well above the current price.




Metals USA Holdings Corp (NYSE:MUSA)

Another refiner to take a look at is Murphy USA. Murphy USA is a retailer of gasoline products and convenience store merchandise primarily in the US. The stock is a Zacks Rank #2 (Buy) that’s surprised earnings to the upside each of the last two quarters. Last quarter’s 19 cent beat on $1.17 consensus amounted to a 16.24% jump while the quarter ending in June saw earnings come in at $1.57, a whopping 80.46% higher than consensus estimates calling for 87 cents.

The Zacks Consensus hasn’t just been going up, it’s been growing leaps and bounds over the last 90 days. The impact of analysts’ revisions to the upside is most pronounced in the current quarter and current year numbers. For the current quarter, consensus has jumped from just 58 cents to $1.47 per share. For the current year the numbers jump from $3.52 to $4.59.

Similar to the chart pattern we see on Tesoro, Murphy USA had a stellar 2014. The difference between the two is the mild nature of the pullback in MUSA relative to TSO. Whereas TSO dropped 20% off its highs MUSA retreated from $72 to $68, a very quick dip. Here you’ve got a stronger technical pattern as well with the 25x5 providing trend line support since the price rose above it in mid-October. After the pullback in early January off the highs stochastics and other overbought/oversold indicators have cooled off implying that there may be more to this rally.




Bottom Line

While everyone else is shying away from the oil exploration and production stocks, the refiners are holding up just fine. These stocks could very quietly continue their momentum and have fantastic years in 2015.

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