Weak oil prices have been a challenge for most oil producers over the past 12 months. This is to understate the obvious.
Small-fry MLPs, like Linn Energy (NASDAQ: LINE) and Breitburn Energy (NASDAQ: BBEP), have been decimated. In fact, the aforementioned Linn and Breitburn have had to slash their distributions.
Investors, in turn, have replied in kind.[ad#Google Adsense 336×280-IA]Both MLPs have seen their unit price drop 90% this year. Many MLPs have suffered a similar fate.
Even the big integrated giants have had to share in the pain.
Though Exxon Mobil (NYSE: XOM) and Chevron (NSYE: CVX) have been able to maintain their dividends (Exxon Mobil even raised its dividend this year), both are down year-to-date.
Exxon Mobil shares are down 18%; Chevron shares are down 28%.
But one oil segment that has been spared the pain is the oil refiners. Companies that have large refining operations relative to total operations have actually done quite well. Year-to-date, Holly Frontier Corp (NYSE: HFC) is up 17% and Marathon Petroleum (NYSE: MPC) is up 19%. Valero Energy (NYSE: VLO) is up 34%, while Tesoro Corp. (NYSE: TSO) is up 42%. Alon USA Energy (NYSE: ALJ) takes the brass ring: its shares are up 57%.
So why are the oil refiners performing while everyone else is limping along at best? In short, the “crack spread.”
Crude oil isn’t much use in its raw form. Its value is derived from refining it into various products, such as gasoline, diesel and lubricants. The price difference between the raw crude and the higher-value products is known in industry parlance as the crack spread.
The spread between raw crude and refined products has widened this year. You’ve experienced the widening spread firsthand at your local gas station. Crude oil prices have been falling, but gasoline prices have been rising. Last month, the spread between crude and gasoline hit a seven-year high.
Many refineries are running at full capacity to meet fuel demand, which is why crack spreads are likely to remain high. The oil producers keep pumping oil, but the ability to refine oil is limited. The good news for the refiners is that time and expertise are required to bring more refining capacity online.
That said, if you’re an income investor new to the refiners, you’re coming a little late to the party. Most refiners have been bid up to the point that yields aren’t terribly attractive. Tesoro yields less than 2%. The rest, except for Holly Frontier, yield less than 3%. With special dividends, Holly yields over 4%, which is a good yield (though it’s still less than Chevron’s 5% yield).
The big yield in refining is found Calumet Specialty Products LP (NASDAQ: CLMT), which I covered in detail a couple weeks ago.
For some reason, investors still haven’t got the message on Calumet. It’s a refiner and a maker of specialty products – high-end waxes, lubricants and solvents. Perhaps investors are focused too much on Calumet’s specialty-products segment to the detriment of the refining segment. Nearly 64% of Calumet’s sales are related to turning crude oil into gasoline, diesel, jet fuel and other refined products.
Their loss is your gain. Calumet remains a value, and one that pays a $2.74 annual distribution per unit. At the going market price, Calumet’s distribution generates a generous 10.4% yield. Given the outlook on refining, you’ll be hard pressed to find a safer high-yield investment in the oil patch.
— Steven Mauzy[ad#wyatt-income]
Source: Wyatt Investment Research