Sure, the weather is nice now, with changing fall foliage and moderate temperatures dominating the Northeast and Midwest, but snowstorms and subfreezing temperatures will be here before you know it. The good news for consumers this winter is that lower crude oil prices should translate into lower heating costs, especially for those who use heating oil in their homes.
The lower crude oil prices also mean cheaper input costs for oil refining companies, which turn that crude oil into a finished product: heating oil, jet fuel and diesel fuel. Here’s a look at the winter weather outlook for 2015-16 and which energy stocks are best positioned to benefit if colder-than-expected conditions hit.
Will it snow? When it comes to forecasting the weather, even meteorologists admit it can be a bit unpredictable. But the U.S. Energy Administration says forecasts for the Northeast are 13 percent warmer than average this year, forecasts for the Midwest are 11 percent warmer and forecasts for the South are 8 percent warmer.
Meanwhile, the western U.S. is under the influence of an El Nino event, or a warming of the equatorial waters in the Pacific. “From a fuel oil perspective, El Nino tends to decrease fuel demand in the winter because it tends to be not as cold for the Midwest and Northeast,” says Drew Lerner, president of World Weather Inc. in Overland Park, Kansas.
The combination of lower energy prices and warmer winter weather could be a boon to consumers this winter. “A typical cold winter can mean 800 to 1,000 gallons of heating oil, which cost $3,200 to $4,000 in previous winters,” says Tom Kloza, global head of energy analysis at Oil Price Information Service. “It looks like that will cost $2,000 to $2,500 this winter, which is a big savings to families.”
Oil refineries are poised to benefit. The broader energy sector has been hit hard by a decline of more than 50 percent in crude oil prices over the last year. But refiners are one segment that benefits from that price drop, as cheaper crude oil means lower input costs for these companies. Refiners include companies such as PBF Energy (ticker: PBF), Valero Energy Corp. (VLO), Phillips 66 (PSX) and Marathon Petroleum Corp. (MPC).
“It is very profitable to make diesel and heating oil in the November-through-March period. Refiners are beneficiaries when the price of crude oil drops, and a really cold winter could deliver handsome profits for them,” Kloza says.
Despite the global glut of crude oil, refining companies reap revenues through the spread, or difference, between what they pay for crude oil versus what they receive for selling the refined product, such as heating oil.
“Right now, if refiners buy crude oil at $50 a barrel, they can sell heating oil in the $65- to $70-per-barrel range. Those are nice profits,” Kloza says. That compares to a $5- to $10-per-barrel difference that prevailed from 1980 to 2005, he adds. “There has been a paradigm shift. Refining is very prosperous,” Kloza says.
Here is a look at three refinery company stocks trading below fair value according to Morningstar, a Chicago-based independent investment research firm.
Marathon is an independent U.S. refiner with seven refineries. Morningstar rates MPC with four stars, with fair value seen at $65. The stock recently traded around $49. “The refining segment will still largely determine MPC’s profitability. We see this as a positive, given our outlook for U.S. refining over the next five years and MPC’s competitive position,” says Allen Good, senior equity analyst at Morningstar.
Valero has 14 refineries in the U.S., and it exports more refined products than its peers, according to Morningstar, which rates VLO with three stars. “Valero is well-positioned to thrive in almost any market environment, thanks to its high-quality refining assets and their location,” Good says. Morningstar estimates fair value at $68, with the stock recently trading at $63.
Phillips 66, another independent refiner, is rated three stars by Morningstar with a fair value estimate at $88 versus recent trading above $81. “Phillips 66 also holds interests in chemical and midstream assets that boast higher historical returns, add earnings stability and differentiate the company from its peers,” Good says.
No matter final demand levels, profits margins remain rich for refiners and above more historically normal levels. If El Nino fails to deliver the expected warmer temperatures and heating demand soars, revenues could also increase more than expected this winter for refiners. “They all pray we will have a Siberian Express polar vortex,” Kloza says.
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3 Energy Stocks to Benefit from Winter’s Chill originally appeared on usnews.com