Refining continues to be the hottest ticket in energy. And despite my hesitancy to buy highflying stocks, some secondary plays continue to represent value and are worthy of continued support or even new positions if you're not in the refining space yet.
I talk all the time about the differential between West Texas Intermediate and Brent crude, because that spread very succinctly outlines the margins that refiners in the mid-continent can capture, and therefore their profitability. If you look out on the curve of that spread, you see a very rapid narrowing of differentials going through 2013 and into 2014. That would indicate that at least some of the refining stocks are well overpriced here and are "cruisin' for a bruisin'" sometime later this year.
But it might not happen that way, and I'll give you two quick reasons why spreads could remain very wide for much longer than the futures indicate.
One, the Seaway pipeline has had a world of problems in its turnaround. Maintenance issues have plagued the fix from bringing oil up from the Gulf Coast to now bringing it down from Cushing, Okla. Despite pump station additions and modifications, the pipeline hasn't yet come close to reaching its proposed 400,000-barrel-per-day capacity and likely won't do so for several more months. Add to that the newest glut already forming in the Gulf Coast itself, and it's hard to know where they'd put those barrels if they did get to full output anyway.
Secondly, the Exxon Mobil (XOM) Kearl project in the Alberta oil sands is finally ready to ramp up. This monster new flow, along with increasing Bakken oil production and my belief that Keystone XL will be approved in March, will mean another flood of crude into an already swelled Cushing. The glut looks like it will not be relieved in 2013.
So one secondary play to look at is any company that can move Bakken crude out somewhere besides the Gulf Coast. And one idea is PBF Energy (PBF). PBF has been aggressively increasing its offloading capacity through rails at its East Coast Delaware City terminal and has ordered 2,000 more rail cars to move oil from the Bakken to the East, taking advantage of the arbitrage between cheap Dakota oil and East Coast spot prices.
As a transporter and not a refiner, PBF cannot capture all of the benefits of that arbitrage, but it can earn a healthy premium for high-grade sweet Bakken crude delivered on the East Coast, perhaps as much as an extra $2 a barrel. That's a sweet profit increase for this small transport firm, and it makes PBF much more "MLP-able" -- able to convert to a master limited partnership. That is a strong trend move in the space, and it would certainly add several dollars to the share price should it happen. It is a secondary play to be sure, but I like PBF energy here at $38.
Of course, it's a little late, but my recommendation of CVR Refining (CVRR) is still holding, even at $32, up smartly from its IPO price of $25. That's a direct refiner play, and the company has already announced a planned $4.22 dividend distribution for 2013 for a tasty 13% return, even with the big run from the IPO. I wouldn't initiate a position here, but for those who already have some, I wouldn't be afraid of adding to the position while still keeping a terrific average price.