Discussion about this post

User's avatar
David Plon's avatar

I had the fortune / misfortune (depending on the year) of covering this space for awhile. Generally agree with your framing, but a few questions to think about:

1) There’s a bit of a disconnect between “cracks are structurally higher for longer” and “it doesn’t make sense to increase supply”. No one is ever building a new refinery in the US, but what are the incremental returns to a PADD 3 refiner adding an incremental distillation unit if you’re right about cracks? And while the ESG / NIMBY may be a headwind to new supply in the US, it sure won’t slow down overseas capacity growth.

2)The other question I have is whether the COVID-related mothballing has pulled forward earnings. When demand starts to flatten / decline later this decade, it’s going to take a much stronger price response to take out incremental refining capacity because a bunch of the high-cost, marginal capacity has already been taken off the cost curve.

Expand full comment
DTEJD1997's avatar

Hey all:

I've also been looking at this space. I agree with a lot of the conclusions presented.

The cheapest refiner that I've come across is Blue Dolphin Energy (BDCO).

They are the smallest publicly traded refiner that I am aware of. They have gone up in price a bit, and now have a market cap of almost $30MM.

The most interesting thing is that they are probably trading for a P/E of LESS than 1.

They have had a tremendous problem with their debt load, but they made an agreement with their largest creditor. They are also earning money at an incredible rate, and has made progress on their debt in 2022. At the current rate of earnings, they will be able to pay off most of their debt this year. While their debt has gotten them into trouble in the past, they might be able to pay it off and not have to worry about it moving forward.

They also primarily refine jet fuel, which appears to have increasing demand. They have so much operating leverage, that if they can increase their net margin from 6% to 8%, that will boost earnings tremendously.

Earnings will also increase substantially as they pay off their high interest debt.

I don't think this is a high quality company, but with their improved balance sheet, I would think that this should trade for a P/E higher than 1. Heck, they might even be able to trade for a 4-5 P/E?

Anybody else been looking at this?

Expand full comment
4 more comments...

No posts