Ironically, one of the sectors hardest hit by sky-high oil prices is oil refineries. The reasons are two-fold:
- their raw material, oil, is now significantly more expensive
- consumer demand for oil is down as Americans deal simultaneously with a recession and soaring oil prices
Citi dismisses this year as “lost” for refiners, but the bank believes there is great value remaining in the sector. The key is Canada:
…we believe strategic value exists for refiners in the Midwest and Gulf Coast from steady and growing streams of Canadian heavy crude. Furthermore, the economics of building upgrading and refining capacity in Canada is becoming increasingly uneconomic given the cost advantage of assets here in the US. We estimate US refiners could command a $20-$27 per barrel advantage versus new upgrading capacity in Alberta. Furthermore, we estimate Gulf Coast refiners have a $9 per barrel advantage on proposed export refineries in the Middle East.
Citi recommends Valero Energy (VLO) as best of its class–even though Citi cut its estimates by 40%:
We believe VLO will outperform its peers over the next 6- 12 months given its advantaged crude slate and ability to be profitable in this difficult environment.