I have been trying to find a way back into trading refiners, as the group had one of the great runs in 2012 and looks poised to do well in 2013 also. One of those opportunities is coming up today in the initial public offering (IPO) of CVR Refining, which will trade on the Nasdaq under the ticker symbol CVRR. It is expected to raise $520 million by offering 20 million units for $24-$26. I'm recommending purchasing the stock, depending on the IPO price.
Refining has been one of the big surprises for 2012, with some of the mid-continent players such as Tesoro (TSO) and Western Refining (WNR) making the strongest moves for the year of any stocks in the S&P 500. Much of the profitability and strength has come from the now well known spread differential between the two financial crude oil benchmarks – West Texas Intermediate (WTI) and Brent crude, defining the relative prices of the input cost of crude oil and the output price that can be charged for refined products like gasoline and distillate products.
I think I can claim to being the first to recognize (in 2011) the Brent/WTI spread as a useful benchmark in refining margins here at TheStreet and on CNBC back, but I definitely missed how long that spread would stay so unnaturally wide. Today the spread has Brent crude trading $18 above WTI -- historically, the spread tends to be between $3 and $5, with WTI above Brent. This over-$20 per-barrel refining advantage has the mid-continental refiners absolutely minting money and the stocks have shown it in their performance.
So there are two questions to consider when looking at the refining trade: How long can this outsized spread stay wide, and where can we enter this trade which hasn't already run so far and taken most of the profit potential with it?
There has been recent weakness in the WTI/Brent differential -- if you can call a move from a recent high of over $23 to back under $18 weak. But even with the recent turnaround of the Seaway pipeline, the increased flow of oil from the Bakken and from Canadian sands production headed south toward the Gulf Coast is likely to keep spreads wide for another year at least. I wouldn't expect the WTI/Brent spread to trade below $15 anytime soon.
But, in finding opportunities, I have been careful not to recommend refiners at the lofty prices they have had coming into 2013. For example, I remember buying shares of Tesoro when they were trading in the single digits and being happy to sell them in the mid-teens; at its current price of $42, I have no interest in owning the stock.
But today, one of the few refiners in PADD 2 (the MidCon) is offering an limited partnership IPO of its transport infrastructure: CVR Energy (CVI). That offering is slated to get priced between $24 and $26 this morning and represents a ground-floor opportunity to get into the refining trade at a good price. Part of what makes this a better opportunity is that the main player in the IPO is Carl Icahn. Icahn Enterprises is indicated in the IPO to be taking 4 million of the 20 million offered shares without a discount to other subscribers and the underwriters have options for another 3 million.
That's pretty strong insider buying into an IPO. Depending on where this stock gets priced, it could represent a strong opportunity to get into a refining trade -- precisely in the MidCon where it stands to make the most money. I'm recommending purchasing the stock near to the offering price.