The VanEck Vectors Oil Refiners ETF (NYSEArca: CRAK), the first dedicated exchange traded fund play on refiners equities, is lagging traditional equity-based energy ETFs this year, but over the past quarter, the refiners fund is higher by nearly 10% and improving crack spreads could drive CRAK higher over the next few months.
Projected earnings for the S&P 500 Energy sector is expected to increase to $14.0 billion Q3 2017 from $4.3 billion in Q3 2016.
The growth is not surprising as the energy sector has been one of the worst areas in earnings growth. For Q3 2016, the sector is expected to reveal its largest year-over-year earnings decline of 66%, the worst performance of all 11 S&P 500 sectors.
SEE MORE: Energy Stocks, ETFs can Keep Surging
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.
However, some analysts see refiners equities, including some of CRAK’s marquee holdings, as poised to rebound.
[related_stories]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.
“Crack spreads represent the economics of processing raw crude oil into oil products like gasoline and heating oil. There is a seasonal component to the oil product market. When it comes to gasoline, the price of the energy product tends to rally during late winter and spring as the summer is the season of peak demand as many vacationers take to the open road in their automobiles,” according to a Seeking Alpha analysis of crack spreads.
Refiners are also investing in midstream assets, which can provide earnings and achieve higher midcycle returns, with less volatility, Good said.
Related: 32 Best ETFs to Track Crude Oil
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.
“Whether you are an investor that has positions in refining companies or a trader that trades or positions in crude oil, crack spreads should always be on your radar. These processing spreads provide market participants with a real-time indicator of refinery profitability and also track demand for oil products which reflect directly on demand requirements for raw crude oil,” adds Seeking Alpha.
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VanEck Vectors Oil Refiners ETF (NYSEArca: CRAK)
