Freshen Up The Energy Portfolio
Over the past few days I have received a few inquiries regarding the absence of any commentary within the Q4 playbook on refiners. Within the Q3 playbook I cited refiners as one of my investment opportunities that should be allocated at overweight. Currently, I would continue to hold exposure to refiners as the favorable tailwind of the cheapest geographical oil price, West Texas Intermediate, allows for continued strong margins. However, for Q4 it is warranted to reduce allocations to refiners from overweight to market weight.
Gasoline inventories (Figure 1.1) in the past week have risen 2.47 million barrels to 200.3 million. The cash market pricing for Gulf Coast gasoline has weakened as well in the past week as Valero’s Meraux refinery in Louisiana is operating once again. That 135,000 barrel-per-day refinery has been nonoperational since a July 22 fire. Western Refining restarted its Gallup refinery as well this past week.
Out west, inventories of Carbob, California’s gasoline blend, jumped 4.9% to 5.13 million barrels. Also, the culprit for California’s recent spike in gasoline prices was the loss of 150,000 barrels per day from ExxonMobil’s Torrance refinery due to a power failure. That plant is now back online. Most importantly, California Governor Jerry Brown’s directive to the California Air Resources Board to allow refineries to produce gasoline with higher vapor pressure and more butane is a much needed policy shift to ease retail prices.
As portfolio allocations to refiners are reduced, the question becomes, “Where should the capital flow to?” I would suggest keeping it within the energy sector via mega-cap integrated oil names offering aggressive capital allocation strategies. I suggest that some of these companies can be viewed as “defensive” energy names that should outperform even if the overall S&P 500® Index (SPX) corrects further.
Consider the following:
- In 2012, Exxon Mobil (XOM) will allocate 25% of its market cap toward buying back its shares and paying out dividends. Suncor (SU) 10% of its market cap, Chevron (CVX) 20%, and ConocoPhillips (COP) 27%.
- Year to date, XOM is +7%; COP +3%; CVX +6%, and SU +15%. All are outperforming the year-to-date performance of spot WTI (-7%) and the high beta oil services ETF (OIH) +2%.
Figure 1.1 Gasoline Inventories, October 2011 to October 2012