Delek Gets Dumped

 | Sep 26, 2012 | 12:00 PM EDT
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In the past week, two Delek US Holdings (DK) executives reported sales totaling about $410,000 in shares of the booming downstream refiner and distributor. COO Frederec Green cashed in approximately 6% of his holdings, with proceeds of more than $300,000. The other insider, Director Charles Leonard, sold about $110,000 worth of shares. The company's stock has performed exceptionally over the past few years and is up 127% year to date.

We like to track insider activity because insiders have historically outperformed the broader market by an average 7% annually (read the report here). Insiders sell stocks for any number of reasons. Looking at the historical data for Delek, we can see that Green and Leonard's sales are not isolated. Since shares entered the $20 price region, insiders have begun to accelerate selling activity, which you can view here. In fact, the number of unique participants in this selling spree has increased to seven, another important insider signal.

The reason for this is likely not due to anything on Delek's end but, rather, on broader market conditions. Over the past few months, a number of independent refiners have seen their shares increase disproportionately to integrated oil companies, and exploration and production (E&P) businesses. We detailed recently that, for instance, Marathon Petroleum (MPC) has outperformed Marathon Oil (MRO); the former is a downstream refiner and the latter is an upstream producer. Additionally, we noted that an increase in commodity prices would be a short-term headwind for these independent refinery and chemical companies, suggesting that E&Ps and super major integrated oil companies would eventually become better options.

Indeed, a recent report from Credit Suisse indicates that it is time for investors in downstream refiners to take some money off the table. According to the report,  these independent refiners still face a possible 40% upside long term. This is particularly likely if Light Louisiana Sweet crude (LLS) continues to trade at a discount to Brent crude. LLS trades in the low $90s, with momentum downward, while Brent crude trades around $110. Since the crack spread -- the difference in price between crude oil and refined products -- benefits from lower oil prices, Credit Suisse analysts see the possibility of long-term benefits for domestic refiners.

Though they see short-term margin pressures, the analysts nevertheless increased their price target on several refiners. Particularly, Credit Suisse's favorite among the bunch is Tesoro (TSO), which is trading between 7x and 8x forward earnings, which is very low for the downstream group. Additionally, the company has the lowest EV/EBITDA among Marathon Petroleum, Phillips 66 (PSX) and Valero Energy (VLO).

Commodity prices have been especially capricious lately, and we do not have unguarded enthusiasm for upstream E&Ps and integrated oil companies. Though many anticipated increases in the price of crude oil after the latest bond-buying stimulus from the Federal Reserve in the form of quantitative easing, Nymex crude has dipped 7% in the last week. Kyle Cooper, managing partner at IAF Energy Advisors, says that macroeconomic and equity factors, rather than supply-and-demand factors, are responsible for these price fluctuations. He has a point: the S&P 500 has meandered in the past week as investors looked for signs of good news besides the (now routine) shot of Fed stimulus. The S&P 500 has fallen 0.6% in the past week.

The upshot? An investment in oil is an investment in a particular market outcome. And the market, as we are well aware, faces a fiscal cliff in the U.S., volatility in the Middle East, and an unsettled eurozone crisis. Unless one has a positive outlook on all of these events, it might not be a bad time to take some profits or to refrain from the energy sector in general.

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