Published August 14, 2012
Monday's news that Tesoro (TSO) will pay about $2.5 billion for BP's (BP) Carson, California refinery and related assets is just the latest sign refiners are back. On an anecdotal basis, the Tesoro/BP deal highlights the vibrancy of the downstream business as Tesoro is expanding its footprint in the California market.
Refining oil into gasoline is notoriously costly in California due to the state's rigid environmental requirements that are rarely found in other states. Still, Tesoro opted to expand its presence in the Golden State and even as oil prices remain elevated by historical standards, shares of refiners have surged in recent months.
"Roaring back" and "resurgent" are descriptors that may not do the refining sector justice. In the past three months, Valero (VLO) is the "laggard" a trio including HollyFrontier (HFC). Over that time, Valero is almost 27 percent while HollyFrontier is up nearly 33 percent. Tesoro easily trumps both with a surge of 73.1 percent.
Do not forget about Phillips 66 (PSX). Separated from ConocoPhillips (COP) earlier this year, Phillips 66 has gained almost 23 percent since that separation, becoming one of the year's best spin-offs in the process.
Investors obviously have multiple options when it comes to refining stocks and for those looking to capture upside in several refiners at once, there are some ETFs to help.
IndexIQ Global Oil Small Cap ETF (IOIL) The IndexIQ Global Oil Small Cap ETF has a deceiving name because the fund is not excessively weighted to speculative small-cap fare. However, IOIL does devote 36 percent of its weight it refining and marketing firms. That exposure to refiners is far in excess of what investors will find with most other energy ETFs.
Tesoro and Sunoco (SUN) combine for over 16 percent of IOIL's weight. The two are the ETF's third- and fourth-largest holdings, respectively.
PowerShares Energy Exploration & Production Portfolio (PXE) The PowerShares Energy Exploration & Production Portfolio is another example of an ETF with a name that does not imply how levered the fund actually is to the refiners' trade. PXE's roster of 29 stocks includes five pure play refiners and a couple of other stocks with downstream exposure.
Marathon Petroleum (MPC), another refining spin-off is PXE's top holding at six percent while Valero, Tesoro and HollyFrontier combine for over 12 percent of the fund's weight. PXE has jumped 10.3 percent in the past month. A move to the $28 area would take the ETF to its highest levels since April.
Rydex S&P Equal Weight Energy ETF (RYE) No single stock occupies a large percentage of RYE's weight and that is to be expected with an equal weight product. What is surprising is that RYE's top three holdings are refiners Tesoro, Valero and Marathon Petroleum. Sunoco is found further down RYE's lineup and the ETF's roster includes enough exposure to integrated oil names to make this fund a legitimate play on the refining renaissance. Despite thin volume, RYE has gained 9.4 percent in the past month.
For more on energy ETFs, click here.
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