Valero's refinery in DelawareCHRIS GARDNER
It's that time of year where I pick my three top energy/oil stocks for 2010.
But, before I get into the new crop of selections, I'm going to take a rare victory lap on the three I recommended for 2009 -- Chevron , Enbridge Energy Partners and Petro-Canada.
I recommended all three on Dec. 22, 2008 with Chevron trading at $69.39, Enbridge trading at $24.49 and Petro-Canada trading at $22.55. As of Monday, Chevron has shown a 11.7 per cent gain for the year, but Enbridge has more than doubled (102 per cent ) since the recommendation, while delivering its juicy distribution and Petro-Canada also showed a doubling before July, when it was moved to the Toronto exchange and merged with Suncor energy -- a huge winner too. Past performance being no indication and blah, blah, blah -- but let's hope these three picks will be equally worth watching.
I'll count down on my top three energy stocks, giving my top pick last. This rating process is practically arbitrary, because I believe almost equally in each. For No. 3, I've chosen a refining stock -- Valero .
The refining sector has experienced the worst combination of economic factors over the last year and the stock prices in that sector have reflected that.
Domestic demand for refined products have sunk to multi-year lows in the midst of a consumer recession.
Supply continues to expand particularly with distillate products. With the winter upon us, the distillate stockpiles have taken precedence over gasoline and their surfeit has further depressed refinery stock prices.
In addition, the drop in the U.S. dollar, combined with liquidity and investment interest in crude oil, has forced prices on the crude barrel higher without any fundamental reason. Unfortunately for the refiners, their finished products, also transparently traded on exchanges, haven't followed suit. Therefore, their profit margins have been squeezed mercilessly. It's as if corn flakes were selling in the supermarket for less than the corn needed to produce them -- an untenable economic position.
So, with all the major headwinds facing the refining picture, how can I possibly pick Valero as one of my top stocks for 2010? It's because the history of oil is one of quick changes, and I believe the refining picture is destined to change very soon. Valero's particular reliance on sour crude blends for their refineries will be helped by the Saudi and OPEC shift to sour crude benchmarks that will begin Jan. 1st, making the prices that they pay for input costs less dependent on the NYMEX-traded West Texas Intermediate.
While we can't know when the consumer will come back, it's clear that the recovery is at least beginning and in all likelihood, the demand picture for refined products is certain to get better from here and not worse.
From the supply side, Valero and others have begun to make the toughest moves to cut supply of products by beginning to close refineries. In Aruba, they shut down a major refinery and recently permanently closed another refinery in Delaware City. Sunoco has indefinitely idled a 150,000-barrel- per-day refinery at Eagle Point, N.J. These are the first of what I think will be a trend of reduced output and outright shuttering of refineries.
This is serious stuff. This country has a very limited resource of refineries, with only a total of 150 of them. Refineries cannot be easily stopped and restarted, nor are there more being built. No one wants to be in the business these days.
What we have are all the makings of a true fundamental shortage of refined products that can change quickly at the first sign of increased demand. I believe we'll begin to see that demand, along with a whittled supply in the spring of 2010.
But once this trend is in place, it'll be too late to buy the stock. Now is the time, when the fundamental picture couldn't possibly look worse. Valero was a $70 stock at the beginning of 2008. It's trading a bit more than $16 dollars now. And to help you wait, it's still delivering a very safe 3.5 per cent dividend. It's a value story.
There's also a trader's maxim that one should buy when nobody wants it and sell when everyone does, and that's a big part of what makes Valero one of my top energy stocks for 2010.