With energy ranking as the best-performing sector in the S&P 500 this year, it’s not surprising that exploration and production, integrated oil, and oil services stocks and the related exchange traded funds are drawing ample adulation in the investment community. However, market participants might not want to gloss over refiners, which are accessible in basket form via the VanEck Oil Refiners ETF (CRAK). When it comes energy ETFs that are delivering for investors this year, CRAK is no shrinking violet, as highlighted by a 2022 gain of 22.40%.
Perhaps adding to the allure of CRAK as an idea for tactical investors into year-end and into 2023 is earnings quality. This year, earnings quality has been strong across the energy patch, and analysts expect that trend will continue in the current quarter for refiners.
“U.S.-based refining companies could post very strong fourth-quarter financials to finish 2022 with near all-time record profitability if middle distillates crack spreads hover at current levels and gasoline margins remain elevated,” noted Fitch Ratings.
In earnings before interest, taxes, depreciation, and amortization (EBITDA) terms, the outlook for refiners, including some CRAK components, is attractive. Fitch is forecasting annual EBITDA growth for refiners of 3x this year as the group ascends to all-time EBITDA highs.
“All Fitch-rated U.S. refining issuers have Stable Outlooks, and a strong 2H22 may not lead to positive rating actions, as we focus on midcycle crack spreads, capital allocation, cost of renewable fuel standard compliance and concerns about demand destruction linked to higher prices or an economic downturn,” added the ratings agency.
CRAK may already be pricing in some of that momentum. The VanEck ETF gained 4% last week, extending its one-month gain to 14.76%.
Another factor working in CRAK’s favor is the improving free cash flow (FCF) outlook in the refiners space. That could pave the way to elevated shareholders rewards, including buybacks and dividends. Some refiners are already committing to such expenditures.
“U.S. refiners applied incremental cash flow from operations (CFO) in different ways. Share buybacks, cash balance increase and debt reduction were among the most popular uses. Issuers acted broadly in line with our forecasts for 2022,” concluded Fitch Ratings.
CRAK follows the MVIS Global Oil Refiners Index and holds 25 stocks.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
