Wednesday, October 30, 2013

Phillips 66 Sends a Warning Sign to Refiners

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

At 2 p.m. EDT, the Fed released a policy statement that said the economy was too weak to start tapering. That promptly caused the Dow Jones Industrial Average (DJINDICES: ^DJI  ) to fall from breakeven to a loss of 0.24% near the end of trading. The market's reaction has ranged from exuberance to fearfulness when monetary stimulus is extended, so I don't think the short-term reaction is anything to lose sleep over.

Energy stocks are struggling along with the rest of the market, and one driver is oil, falling 1.3% today thanks to a 4.1 million-barrel rise in U.S. oil inventories. The energy sector is also being hurt by weak earnings from Phillips 66 (NYSE: PSX  ) , which should send a warning signal to some of the major refiners.

Phillips 66 said third-quarter profit fell from $1.6 billion, or $2.51 per share, in the year-ago quarter to just $535 million, or $0.87 per share, last quarter. Management said this owed primarily to a 40% drop in the crack spread, or the difference between the price of gasoline and the price of oil. You can see below that oil is up 15% over the past year, while gas prices are down 5.6%.

WTI Crude Oil Spot Price Chart

WTI Crude Oil Spot Price data by YCharts.

Big oil companies and refiners ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) will both report earnings in the next two days, and they'll likely face the same challenges as Phillips 66. The difference is that they have much more exposure to oil exploration, which is doing quite well on rising oil prices. This is one of the advantages of investing in big oil companies: They have exposure to both the good and the bad in the market.

Long-term challenges facing refiners
The tough challenge facing U.S. refiners in the long term is that gas consumption in the U.S. is falling, while oil prices are rising. The rise in the price of oil is due to marginally higher global demand and, more importantly, more expensive oil-extraction.

I don't see these trends changing, which will continue to put pressure on the refining business.

Refiners are down, but U.S. energy production is booming
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