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As U.S. Refiners Recover, This Company Aims to Jump to the Next Level
by Investment U Research Team
Even as U.S gas prices climb, petroleum traders still have no interest in buying right now.
And why would they? The summer driving season is at an end. Consumers are still trying to save cash, especially with the holidays approaching. And inventories are still bearish.
Last week, the Department of Energy (DOE) said gasoline demand is at 8.844 million barrels per day – the lowest number since late January 2009. And with practically no demand, refiners are still running at only 80% capacity, on average.
So with refinery woes persisting, it might seem odd to devote attention to investments in the industry. However, that’s precisely why you should. A contrarian strategy often pays dividends – and the recent challenges have shaken out the weak players and created opportunities for survivors.
Simply put, companies with significant cash flow are in strong positions to conquer their weaker peers. And that includes this one…
Delek’s Two Potential Refinery Targets
During its recent third quarter conference call, Delek U.S. Holdings (NYSE: DK) announced that it will aggressively seek to acquire refining and retail assets.
Referring to the company’s only oil refinery in Tyler, Texas, CEO Uzi Yemin said, “We don’t want to stay single-asset.”
There’s a precedent for this, too. In 2005, when the market was suffering in a similar way to today, Delek purchased its refinery in Tyler. And now, it’s ready to strike out again.
With the recent downturn in refining, there are multiple choices for Delek to consider. Yemin has two goals in mind…
- Delek is looking to purchase niche, inland refineries and high-quality convenience stores.
- The right acquisition will not exceed about 2.5 times Delek’s operating cash flow.
There are two potential contenders here. Marathon Oil Corp’s (NYSE: MRO) 79,000 barrel per day refinery in St. Paul, MN. is believed to be on the block and also has the advantage of being close to Canadian crude supplies.
In addition, the bankrupt Flying J’s 35,000 barrel per day refinery in Salt Lake City is for sale.
Given where the refining industry is right now – and where it could go from here – there is a chance for investors to play the industry cautiously. The fact is, demand will return as effects of the recession wane.
Some analysts say Delek will purchase a refinery within the next six months, thus giving it a bigger piece of the U.S. refining capacity pie. This is significant, given that the last U.S. refinery was built 40 years ago.
While Delek reported a net loss of $5.1 million from continuing operations ($0.10 per share), versus net income from continuing operations of $24.4 million ($0.45 per share) a year ago, the company’s cash position during the recent quarter exceeded $107million, with net debt to capitalization was less than 30%.
So if you can accept a little risk, an early investment is best bet.
Good investing,
Sheena Martin
P.S. For more on how you can profit from rising oil prices, check out this column from my fellow energy expert, David Fessler. David also writes a column devoted exclusively to energy and infrastructure in The Oxford Club’s Communiqué newsletter. You can find out more about that – and how to get his specific recommendations – here.
- American Refiners Have a Problem… And the Government is Making it Worse
- Two Big Reasons to Dump your Oil Refinery
- Despite What the News Tells You, Crude Oil Prices Set to Fall
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