The refiners are my favorite sector going into 2013. Looking back at 10 years of history, when these things trend, they can trend very hard and persistently. I believe we’re in the early innings of this rally off lows established from Summer 2011 thru Summer 2012.
I’m going to do it in basket fashion. Some may get a few extra dollars allocated, but I am going to spread this bet amongst:
Fundamentally, I’ll always believe refineries are as crucial to American capitalism as the Federal Reserve is to banking. Remember 2007, when all the talk in that booming sector was that no new refineries had been built since the 1970′s… and the obvious and powerful “not in my backyard” attitude that keeps new ones from being built ? Concepts like “why can’t we build more of these damn things?!?!” were widely thought about as people filled their tanks.
Well the root cause hasn’t changed. These companies own plants which at the time were hailed as damn near irreplaceable gems, only to see their stocks walloped as the industry’s margins (comprised mainly of 321 Crack Spreads) turned negative, not coincidentally forcing the sector’s fall from favor. I think that mantra will become mainstream once again before HFC is the beast of the bunch, both technically and fundamentally. HFC makes more money than VLO, on about 15% of the revenue. I still like VLO though, as their leverage could becme a margin-booster going forward (unlike in the coal sector at present).
One of my least favorite sectors is Nat Gas E&P. The contracts the big ones have signed for leases are high compared to the price of Natty (even after its move from $2 to $4). I’m envisioning Chesapeake (CHK) & Ultra (UPL) both in single digits by this time next year. I also like RRC I’m debating between growing this basket with more individual stocks, or just adding to the trade using the ETF FCG.
Such sector trades can always be done individually, or as a pair. The latter being a more risk averse strategy. I like these either way, and but lemme make it clear I’m not recommending you the web surfer take any of this as investment advice.
Good luck out there.