Refiners? No, Thank You

 | Mar 14, 2013 | 12:00 PM EDT
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Lately, there have been some falling knives that readers and even some colleagues have been asking me to catch: refining stocks. Let me see if now's the time to get back into that trade and stick my hands into a dangerous arena.

On Monday, I wrote a column about rising gas, and how they are being caused by an out-of-control program at the Environmental Protection Agency designed to boost renewable fuels. I followed up on Tuesday and Wednesday with appearances on Bloomberg, Fox Business and at The Street with Jim Cramer, outlining the major hurt I believe the continuing EPA program will impart on consumers at the pump in a self-inflicted rising gasoline price.

But what about the refiners whose margins are being squeezed by the EPA program? The sector has taken a dive over the last two days, dropping a few percentage points in a rising overall index, somewhat bringing down the high-flying share prices of huge momentum plays like CVR Energy (CVI), Tesoro (TSO), Valero (VLO), Marathon Petroleum (MPC), Holly Frontier (HFC) and Western Refining (WNR).

Since these stocks have been some of the best performers for 2013, the question is: Does this moderate drop represents an opportunity to reload? I say no.  

Chasing the refinery stocks through their massive rise this year has been difficult, if not impossible, to time correctly. I recognize the enthusiasm that goes with momentum stocks that are on a run like these, and important fundamentals we have often discussed are driving them. But, as a sector, these prices are far ahead of where they are comfortable for me to recommend, even with this moderate downdraft.

Yes, the margin squeeze from the skyrocketing price of renewable identification number (RIN) credits is still only a small part of refiner profitability, and it could easily be passed along to the pump if the futures markets cooperate. Yes, exporting gasoline is a possible if costly alternative for them. Yes, I still believe spreads between Brent crude and West Texas Intermediate will remain robust for 2013, and spur delicious continuing margins overall.

But I also remember buying Tesoro shares at $10 and considering myself a genius, then selling them for a 40% profit at $14 in 2009. Now, do I want to invest at $56 after a drop from $59? No thank you. When this refinery margin craps game ends, as it did in 2007 and will again, I don't want to be long at the highs.

My advice has been to engage in those divestiture plays in refining that have emerged where the investor momentum hasn't yet played a part. That would include the spin-offs -- as with Marathon Oil (MRO) into Marathon Petroleum, or Tesoro Logistics (TLLP) from mother ship Tesoro, or CVR Refining (CVRR), which had its initial public offering more recently.

Wait for those opportunities. One of the biggest coming up is the Chevron (CVX) spin-off in the mold of the Phillips 66 (PSX) spin-off from Conoco-Phillips (COP). I missed the latter, but it was a big, big winner. I have no reason not to think that each one of these spin-off plays represents a far better opportunity than does trying to catch these other falling refinery knives.

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