A surge in light oil production in the United States will put Gulf Coast oil refineries in a position to profit from the difference in their input costs and what they receive from the sale of downstream refined products.
It means that Canadians who are upset by the fact that the United States has a monopoly on Alberta oil sands production can gain a measure of revenge by acquiring shares of U.S. refiners such as Valero Energy Corp. (NYSE: VLO, Stock Forum) Marathon Petroleum (NYSE: MPC, Stock Forum), Northern Tier Energy (NYSE: NTI, Stock Forum), and HollyFrontier (NSYE: HFC, Stock Forum).
This advice comes from Keith Schaefer, editor of the Oil & Gas Investments Bulletin, who spoke to the Cambridge International investment conference in Vancouver Monday.
“Don’t get mad, get even. Buy these stocks, they are going higher,” he said.
A Vancouver-based newsletter publisher, Schaefer was quick to say that shares of U.S. refiners are not easy to buy and a number of them have been trading lately at close to 52-week highs.
“But I am buying them here and I will keep buying them,’’ he said.
His investment thesis is based on structural issues in the North American energy sector that cannot be easily resolved. He predicted that these issues will combine to give the refineries a “huge turbo charge in profitability.’’
This is because in the next few years, hydraulic fracturing is expected to spark a huge surge in light oil production from key areas such as North Dakota and Texas.
As there is very little new refining capacity being built to process the increase in production, refineries benefit by acquiring cheap domestic oil and selling the refined material at global prices, which are considerably higher than what the refineries pay to Alberta oil producers, for example.
“This trend should last for the next two or three years,’’ Schaefer said.
In another key development, Schaefer said the rise in production means that Gulf Coast refineries will no longer need to import light foreign oil. This could happen as early as the third quarter of 2013, he said. “Energy independence will be good for the refiners but not the producers,’’ he added.
Other companies on Schaefer’s buy list include Callon Petroleum (NYSE: CPE, Stock Forum), and DeeThree Exploration Ltd. (TSX: T.DTX, Stock Forum).
Trading Monday at $6.73, DeeThree has a market cap of $478.4 million, based on 71 million shares outstanding. The 52-week range is $7.20 and $2.56.
Callon was up 1.4% Monday to $5.12, leaving the company with a market cap of $203.7 million, based on 39.8 million shares outstanding. The 52-week range is $7.95 and $3.80.