Starting with the article about Valero posted below, I will be contributing a handful of articles to InvestorPlace each week. It’s a really cool site with lots of great analysts and analysis, and I already know from experience how selective and serious they are about their content. I’m happy to be working with them, and I hope I can provide some great content for them as well.
Valero Still A Buy After Iran’s Oil Production Hike
Oil prices hit their lowest levels since 2003 this week on news that Iran will be adding another half a million barrels per day to an already highly oversupplied global oil market. While the oil glut has sent oil prices plummeting and hammered the share prices of many U.S. shale producers, falling crude prices and an overabundance of crude oil isn’t bad news for the entire oil industry.
Valero Energy Corporation (VLO) is one of many refiners that welcomes every barrel of oil that Iran produces. As you’ll see in the chart below, refiners have been laughing all the way to the bank in recent years as the broader energy sector suffered.
A Delightful Dynamic
For refiners, falling crude prices means falling input costs and higher margins, a recipe for higher profits and share prices.
In the past five years, top U.S. refiners Valero, Phillips 66 (PSX) and Marathon Petroleum Corp(MPC) have more than doubled the returns of the S&P 500, while the Energy SPDR (XLE) is down more than 25% during that same stretch:
The Iran news is yet another indicator that the global supply glut will likely take years to work through, and the beneficial market conditions for refiners will persist for now. This argument is the basis behind Credit Suisse analyst Edward Westlake’s December call that refiners will have another great year in 2016. Said Westlake:
“On balance, we think 2016 will be characterized by healthy earnings (driven by gasoline), with complex coastal refiners able to process cheaper medium crudes, with narrow mid-con crude differentials, and with diesel margins remaining challenged.”
In addition to Credit Suisse’s “Outperform” rating, just last week Morgan Stanley also gave…
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