There's a great opportunity in the oil sector right now...
As regular readers know, crude-oil prices have plummeted over the past year... down 45% from their June 2014 high. And they've taken most oil stocks with them. The Energy Select Sector SPDR Fund (XLE) – which holds a basket of energy companies that are in the S&P 500 – has fallen 20% in the same time frame.
But one group of companies is benefiting from low prices...
As we've shown you in these pages before, the U.S. is producing massive amounts of oil and gas. Annual U.S. crude-oil production is up more than 70% since 2008. Annual gas production is up 30% over the same period.
The U.S. is producing so much oil and gas that it's outpacing supply. The Energy Information Administration (EIA) expects global oil inventories to increase 2.2 million barrels per day in the first half of the year, according to its most recent report.
All of this excess oil and gas means we have historically high crude-oil inventories in the U.S. right now. As of May 22, crude-oil inventories are 85 million barrels more than the record 2014 levels.
Until the oil demand/supply equation balances out and inventories decrease, oil prices will remain low.
And in the meantime, one group of companies will continue to profit from these low prices...
I'm talking about oil refiners, which take crude oil and turn it into production like gasoline, diesel, and fuel oil.
If these companies can buy oil cheap and sell those products at high prices, they make a lot of money.
And that's exactly what we are seeing today...
To take advantage of current prices, refiners are processing record amounts of crude oil. For example, in 2014, they processed more crude oil than ever before. And their earnings are at some of their highest levels over the past few years.
For example, large refiner Valero earned seven dollars of operating income for every $100 of sales in the first quarter. It hasn't earned margins this high since 2007.
And the company's share price is benefiting...
Valero has shot higher over the past six months... The big January move came when it blew away its fourth-quarter earnings estimates.
Valero's competitors are making money, too. The table below shows the operating margins of Valero and several of its peers.
|
Company
|
Operating Margin
|
YTD Return |
|
|
2013
|
2014
|
Q1 2015
|
|
|
Valero
|
4.1%
|
5.8%
|
7.0%
|
18%
|
|
Tesoro
|
2.0%
|
4.0%
|
5.3%
|
14%
|
|
HollyFrontier
|
6.2%
|
2.6%
|
12.9%
|
11%
|
|
Western Refining
|
5.7%
|
7.2%
|
11.0%
|
15%
|
|
CVR Refining
|
6.9%
|
2.4%
|
8.4%
|
17%
|
|
Northern Tier Energy
|
4.8%
|
5.5%
|
15.1%
|
19%
|
|
Alon USA Partners
|
5.2%
|
6.8%
|
9.0%
|
60%
|
As you can see, these companies are benefiting from today's low-oil-price environment. The share prices of all of these companies are up since the beginning of the year.
And Greg Armstrong, chairman and CEO of midstream master limited partnership (MLP) Plains All American Pipeline, believes the bullish trend in refiners will continue.
Armstrong is good at what he does. Since he became CEO in 2010, Plains' units (units of MLPs are like shares of stocks) have more than doubled from $20 to about $45.
Once a year, Armstrong and his team host an investor-day presentation. During it, they present and discuss details about how they believe the market will affect their current and future business. They're often very accurate.
For example, last year, Armstrong told investors that the growth in oil supply had outpaced demand since 2011. He said crude-oil prices could fall 40% to bring supply and demand in-line.
He was right... The crude-oil price fell 60% from its June 2014 high. And as I mentioned earlier, it remains 45% below it today.
As I said, Armstrong believes refiners will continue to benefit this year. He expects refineries to process at least 250,000 more barrels of oil per day this year than last. To put this number into perspective, it's nearly 3% of the crude oil produced last year.
In short, as long as crude-oil prices remain low, refiners will continue to pump out profits... And their share prices will continue to benefit.
If you're looking for a way to invest in the oil sector right now, I recommend looking into some of the above names today.