The Market Vectors Oil Refiners ETF (NYSEArca: CRAK), the first dedicated exchange traded fund play on refiners equities, is languishing this relative to other equity-based energy ETFs, but that is not surprising.
The oil refinery business benefits from lower crude oil prices, or lower input costs. Meanwhile, the price of finished products such as gasoline, diesel and fuel oil can affect a refinery’s profitability. Consequently, the difference between the cost of crude oil and the price of the products, or so-called crack spread, is a common indicator of the potential profits.
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However, some analysts see refiners equities, including some of CRAK’s marquee holdings, as poised to rebound.
A significant part of oil’s problems this year is attributable to the Organization of Petroleum Exporting Countries (OPEC) refusing to cut production in an effort to stem slumping prices. However, OPEC still has plenty of skin in the game, hence the cartel’s bullish prediction on crude prices.
OPEC has kept up production to pressure high-cost rivals, such as the developing U.S. shale oil producers. The International Energy Agency expects it will take several years before OPEC can effectively price out high-cost producers.
[related_stories]CRAK tries to reflect the performance of the Market Vectors Global Oil Refiners Index, a modified market cap-weighted index that follows the largest and most liquid companies in the global oil refining industry.
“On our analysis, Marathon Petroleum (+19% upside), Delek (+13%), and HollyFrontier (+8%) screen best, with the group showing an average upside of 10% in the base case. While we acknowledge the potential for further underperformance given the notable downside risk to Street estimates (~26% downside risk to 2017 consolidated EBITDA vs ‘base case’ view), and the likelihood that the scenarios used in this analysis may take some time to play out, we believe current refiner share price levels offer an attractive entry point (or to add to positions) for longer-term investors,” according to a Deutsche Bank note posted by Ben Levisohn of Barron’s.
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Refiners are also investing in midstream assets, which can provide earnings and achieve higher midcycle returns, with less volatility, Good said.
Furthermore, many refiners have generated free cash flow, which have been returned to shareholders through dividends and share buybacks. While yields have remained relatively low, dividend growth is picking up.
Market Vectors Oil Refiners ETF
