Welcome to the second part of my “refiners parallels to the offshore inflection thesis. Last weekend, I posted part 1 of the thesis, which covered why I’m interested in refiners, how they’re fairly valued on mid-cycle earnings, and how much cash flow they’re currently gushing.
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.
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?
BDCO came out with earnings today. I was calculating that they would do $2.35 in earnings for 2022. Earnings came in at $2.34, so it was a slight miss.
Even with the miss, I am still bullish on it.
The 1st quarter just ended, and I think they did well.
As they continue to pay down debt, they will get to keep more their money.
I think that the stock could EVENTUALLY trade for a 2 P/E.
The thing I keep trying to figure out is, if margins are truly higher for longer, why are refineries still getting closed/sold? I assume refiners are smarter money than me in the refining space, and generally they are exiting the business or converting to RD/SAF. Is there some looming terminal value risk due to environmental cleanup that means terminal value is actually negative?
Or maybe global capacity increases will be a bigger factor than we expect? US refiners definitely have an advantage with nat gas prices, but hard to argue Saudi refiners don't also have an advantage in input costs (the distance/transport between crude and refinery and vertical integration). I think this advantage shifts further as we pass peak shale and US refiners rely more on imports, but haven't really looked at the numbers to support that.
Does the conversion to renewable diesel really reduce refining capacity? They are still producing diesel, so it could impact crude demand, but it's not obvious to me that it will put upward pressure on crack spreads as their product is still selling into the same market.
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.
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?
Hey all:
I guess nobody else looking at this?
BDCO came out with earnings today. I was calculating that they would do $2.35 in earnings for 2022. Earnings came in at $2.34, so it was a slight miss.
Even with the miss, I am still bullish on it.
The 1st quarter just ended, and I think they did well.
As they continue to pay down debt, they will get to keep more their money.
I think that the stock could EVENTUALLY trade for a 2 P/E.
The thing I keep trying to figure out is, if margins are truly higher for longer, why are refineries still getting closed/sold? I assume refiners are smarter money than me in the refining space, and generally they are exiting the business or converting to RD/SAF. Is there some looming terminal value risk due to environmental cleanup that means terminal value is actually negative?
Or maybe global capacity increases will be a bigger factor than we expect? US refiners definitely have an advantage with nat gas prices, but hard to argue Saudi refiners don't also have an advantage in input costs (the distance/transport between crude and refinery and vertical integration). I think this advantage shifts further as we pass peak shale and US refiners rely more on imports, but haven't really looked at the numbers to support that.
Does the conversion to renewable diesel really reduce refining capacity? They are still producing diesel, so it could impact crude demand, but it's not obvious to me that it will put upward pressure on crack spreads as their product is still selling into the same market.
Very insightful. Thank you.