Curious if you have any thoughts on the estimates for negative growth the next 3 years? I know it doesn’t change much to the thesis and I’ve been a fan/in VLO since 2020. I get the negative growth currently given super normal profits in 2022 into 2023. But I’m a bit surprised by the expectations for such weak growth in say 2025/2026. Is this largely just due to futures term structure? If analysts are backing estimates off of today’s forward prices and production estimates that feels a bit naive vs taking some kind of view on mid-cycle spreads/growth. Particularly as you highlight crack spreads / margins have generally been trending higher long-term. Though both views are likely to be ‘precisely’ wrong in any given year. I wonder if refiner/energy stock revisions are more often positive with steeper backwardation in forward curves?
Thanks Devin. The short answer is that I don't know precisely why. With refineries operating pretty much at max capacity, it would make sense that the top line for models is anchored to the WTI curve with a plug for the cracking spread. I suspect that they will use (backward looking) long run averages for that input. I would be fascinated to see the analyst revision history but have not seen the historical data. I am also not sure how much share count reduction is built into the analysts' current models. Again, I suspect it will be conservative.
Hi obie. It has been a strong start but I don't think so. On MPC and PSX you might want to wait for a pullback but they are the most aggressive repurchasers of their own stock (and PSX has the new 'attention' from Elliott). Some of the smaller names have really only just broken out and crack spreads are supportive.
Btw. Since I prefer less taxable dividend income vs cap appreciation for this year and next, do you have a sense for which names in this basket would be more oriented towards buybacks than divis?
Hi Derek - have a look at the 2nd table (Div Yield vs Buyback Yield) - 5 of the 6 work for you (basically all except CVI). Best on your requirements are MPC, VLO and DINO.
Curious if you have any thoughts on the estimates for negative growth the next 3 years? I know it doesn’t change much to the thesis and I’ve been a fan/in VLO since 2020. I get the negative growth currently given super normal profits in 2022 into 2023. But I’m a bit surprised by the expectations for such weak growth in say 2025/2026. Is this largely just due to futures term structure? If analysts are backing estimates off of today’s forward prices and production estimates that feels a bit naive vs taking some kind of view on mid-cycle spreads/growth. Particularly as you highlight crack spreads / margins have generally been trending higher long-term. Though both views are likely to be ‘precisely’ wrong in any given year. I wonder if refiner/energy stock revisions are more often positive with steeper backwardation in forward curves?
Thanks Devin. The short answer is that I don't know precisely why. With refineries operating pretty much at max capacity, it would make sense that the top line for models is anchored to the WTI curve with a plug for the cracking spread. I suspect that they will use (backward looking) long run averages for that input. I would be fascinated to see the analyst revision history but have not seen the historical data. I am also not sure how much share count reduction is built into the analysts' current models. Again, I suspect it will be conservative.
i'm showing up late to this party ... is the juice mostly out of the refiners trade now?
Hi obie. It has been a strong start but I don't think so. On MPC and PSX you might want to wait for a pullback but they are the most aggressive repurchasers of their own stock (and PSX has the new 'attention' from Elliott). Some of the smaller names have really only just broken out and crack spreads are supportive.
Btw. Since I prefer less taxable dividend income vs cap appreciation for this year and next, do you have a sense for which names in this basket would be more oriented towards buybacks than divis?
Hi Derek - have a look at the 2nd table (Div Yield vs Buyback Yield) - 5 of the 6 work for you (basically all except CVI). Best on your requirements are MPC, VLO and DINO.
Thanks so much!
Bravo. Thanks!
Thanks Derek!
The Squirrel is in fine form!
Thanks Whirly!!
So many lines in there for me to steal. And an investment idea as a bonus!
I know you are deep in the weeds in cracking land, Whirly!! Thanks mate.
This is excellent.
Thanks Erik (and thank you for a piece of the mosaic)! Car tires come next!