Sell Refiners

“Sell Valero Energy, Tesoro and other pure-play refiners,” says Byron King. “These two refiners have been in the OI portfolio for over five years. Both companies refine lower grades of crude oil, which sell at a discount to the higher grades of crude. The idea is to buy the lower grade of oil, refine it into end product and sell at the going price. In the past, this translated into high margins per barrel.

“For much of the past five years, these two refiners spun off immense amounts of cash due to high crude margins. That ended during the oil run-up last year. I hoped that the high margins would come back with an economic recovery. Both companies have done an excellent job of internally managing the tight market. But the margins have not come back, due to the length and depth of the economic crash.

“If I thought that the U.S. economy was going to kick back into a recovery mode, I’d be more optimistic about the prospects for the refiners. But I don’t see things turning around soon. I foresee a future of tight margins on lower versus higher grades of crude. I expect lower margins at the gas pump due to continuing economic problems (especially for Tesoro in not-so-sunny California). And of course it doesn’t help that Congress wants to tax and regulate carbon dioxide emissions from refineries, which are among the most prolific of CO2 emitters.”

If you’ve been keeping up-to-date with your 5 Min. Forecasts, you’ll remember Byron’s advice last week to sell several different sectors. Late yesterday, he gave his readers specific advice to get rid of nine different Outstanding Investments stocks… as clear a sign as any that Byron expects heavy seas in the near future. If you want his advice as well, definitely check out OI. It’s a helluva value.