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Marathon Is Ready to Break into a Sprint

By John Persinos on July 19, 2017

Oil and gas prices are out of whack with the realities of supply-and-demand, causing energy traders to gnash their teeth with frustration. But that’s your cue for making big profits. What most investors don’t realize is that imbalances aren’t your enemy — they’re your friend.

As I make clear below, today’s energy trends are friendly for refiners, one in particular. Before I get to this promising refining stock, let’s put the energy sector’s craziness into proper context.

Robert Rapier, chief investment strategist of The Energy Strategist, comments on the lack of equilibrium in the oil and gas markets:

“Perceptions determine value, and sometimes misperceptions cause share prices to become utterly disconnected from underlying fundamentals…”

Beleaguered energy investors have been habitually overreacting to bad news and underreacting to good news. Geopolitical surprises, of which there have been many, only exacerbate the market’s mood swings. As Robert explains:

“To make things interesting, there are often unexpected shifts in supply or demand, such as when a military conflict impacts Libya’s oil production, or when the U.S. has an unusually warm winter, and natural gas inventories grow.

Unforeseen circumstances like that can make or break companies. But they also create opportunities. We can earn money on disconnects if the market initially fails to reward (or punish) a company with a changing outlook…

One sector that should do well in this climate is the refiners.”

Jim Pearce, chief investment strategist of Personal Finance, concurs that despite the renewed slump in energy prices, refiners are emerging as the winners:

“Lost amid all the angst over persistently low oil prices is how the downturn actually benefits refiners who purchase oil inputs to convert into gasoline and other retail products.”

Riding out the slump…

Benefiting from these bewildering conditions is Marathon Petroleum (NYSE: MPC), a refining stock that’s held in the portfolios of both The Energy Strategist and Personal Finance.

With a market cap of $28.4 billion and low debt relative to its peers, Marathon engages in refining, marketing, retailing, and transporting petroleum products primarily in the U.S. It operates through three segments: Refining & Marketing, Speedway, and Midstream. Robert and Jim like this stock; I do too.

West Texas Intermediate (WTI) crude is selling at about $46 per barrel, and Brent North Sea crude hovers at about $48/bbl. As a domestic refiner with extensive international sales and marketing activities, Marathon gains from the differential between WTI and Brent, which should persist regardless of the overall ups and downs of energy prices.

Marathon continues to methodically expand its best assets and slough off the underperforming ones. Unlike its more reckless peers, the company has kept a handle on debt and can ride out crude’s latest slump.

Giving it the gas…

Meanwhile, many indebted producers are suffering as Saudi Arabia struggles to keep its OPEC production cut in line. Haven’t we seen this tiresome drama before?

You already know the plot: First, OPEC leader Saudi Arabia wants to loosen the oil production spigots. Then it wants to tighten them. Matters get out of hand. Member meetings are scheduled with the goal of regaining market control; the confabs start with great fanfare but end with a whimper. The disarray drags on.

This week, as we witness yet another round of Saudi arm-twisting, it’s increasingly apparent that the once mighty House of Saud is desperate and OPEC is coming unglued. Through it all in 2017, oil prices have been on a steady downward slide, with occasional sucker rallies that quickly fade.

After November 2016 when the Saudi-led cartel trumpeted its production cut agreement with Russia and 11 other producers, the overall mood in the energy patch was positive. However, the pessimists (and I was one of them) warned that the agreement would ultimately fail because some members would cheat and North American shale production would remain robust. The pessimists were proven right.

A few OPEC members indirectly cheated by dragging their feet on output reductions. Vladimir Putin’s petro-state of Russia got the best deal (no surprise there), signing onto a modest 300,000 barrels per day (bpd) curtailment while Saudi Arabia took on a cut of 500,000 bpd. The agreement simply wasn’t sustainable, especially as Putin once again revealed his utter ruthlessness and balked at extending the cuts.

To be sure, initial euphoria over the deal pushed prices up to about $50/bbl, where they stayed for December and January. Then crude began its march downward, back to pre-agreement levels.

Amid this uncertainty and renewed gloom, at least one thing is certain: Oil price volatility is here to stay. However, select refiners enjoy a buffer against the ups and downs of energy prices.

Although low crude prices hurt upstream producers, they actually lift the fortunes of refiners. They’re able to take the cheaper crude and transform it into value-added refined products, including gasoline.

In addition, lower prices at the pump have resulted in soaring demand. The U.S. Energy Information Administration’s Short-Term Energy Outlook released in July shows regular gasoline will average $2.38 per gallon through September, representing the second-cheapest summer for fuel since 2005.

Trying to precisely predict the price of oil is a fool’s game. Projections for the price of black gold are all over the map. Some analysts expect oil to shoot skyward, while others are calling for its further decline. But if you’re a patient, long-term investor, just remember: Oil is the lifeblood of the modern industrial age and the most important commodity in the world. That reality won’t change in your lifetime, even with the inroads made by renewable energy.

As fear and loathing grip the Saudis and energy prices careen on a daily basis, you should heed the judgment of our strategists and consider buying shares of Marathon. It’s telling that as oil prices dropped during the first half of 2017, MPC’s share price barely moved.

As Jim Pearce puts it: “Marathon is capable of breaking out to the upside even if the overall stock market is flat or down.”

The time to buy Marathon is ahead of its next earnings release, scheduled for July 27. The average analyst expectation is that MPC’s year-over-year earnings growth will come in at 100% in the next quarter, 31.8% in the current year, and 27.3% next year. If second-quarter operating results are as strong as expected, the stock should spike upwards — regardless of the vagaries of energy prices.

Got any questions or comments? You can reach me at: mailbag@investingdaily.com — John Persinos

Get ready for “gold mania…”

As I’ve just explained, the price of crude oil continues to seesaw. But several trends all point to an astronomical run-up for the price of another basic commodity — gold.

Worsening geopolitical risks, an overvalued stock market, and the machinations of the gold-hungry Chinese are tailwinds for the yellow metal. When the markets go haywire – especially due to military tensions or civil strife — the price of gold has tended to skyrocket.

For example, in the 12 months following the tragic events of Sept. 11, 2001, gold prices jumped by more than 560%, while the stock markets stalled out.

Hopefully, the unpredictable presidency of Donald Trump won’t exert such a ruinous effect on the world or the economy. But gold already has been soaring this year, with huge potential upside ahead.

Dr. Stephen Leeb, chief investment strategist of Real World Investing, The Complete Investor, and Aggressive Trader, asserts that the price of gold could reach as high as $20,000/oz, allowing investors to turn a $500 investment into $5,000. Intrigued?

Click here for the eye-opening details.

 

 

 

 


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Stock Talk

  1. avatar
    Chris H Reply July 22, 2017 at 8:15 AM EDT

    From your article above …
    “West Texas Intermediate (WTI) crude is selling at about $46 per barrel, and Brent North Sea crude hovers at about $48/bbl. As a domestic refiner with extensive international sales and marketing activities, Marathon gains from the differential between WTI and Brent, which should persist regardless of the overall ups and downs of energy prices.”

    Can you explain why Marathon benefits when there is a significant spread between WTI and Brent? Not sure I understand? Thanks in advance!

    • John Persinos
      John Persinos Reply July 24, 2017 at 3:40 PM EDT

      When the WTI-Brent spread widens, this benefits U.S.-based refiners that obtain cheaper WTI crude. They refine and sell the finished product at a higher margin in a market dominated by more expensive Brent pricing.

  2. avatar
    Rick W. Reply July 20, 2017 at 7:36 AM EDT

    John,
    Is it time to jump on board with CVX in addition to MPC? I don’t want to load up too much on energy but Jim Pearce likes it as a core holding. My concern with it is that it has been in a downtrend since 12/22/16 and I don’t want to try and catch a falling knife. Jim has support around $100 and I have been watching and waiting. Thanks.
    Rick

    • John Persinos
      John Persinos Reply July 20, 2017 at 9:49 AM EDT

      Rick: I like “Super Major” Chevron (NYSE: CVX), too. Compared to the massive amounts of red ink that continue to mar the energy sector’s operating results, Chevron’s profits are holding up comparatively well. That’s because the company has been methodically pruning its portfolio, by sloughing off non-performing assets, cutting expenses and emphasizing its most profitable operations.

      Chevron stands out for its diversification. With a market cap of $198.7 billion, the giant energy producer boasts a mix of assets, including liquefied natural gas (LNG), deepwater fields spread around the world, shale plays in North America, and downstream activities such as refining and retailing. The latter downstream assets confer high margins and somewhat buffer the company from this year’s oil price slump. Chevron’s productive capacity is well diversified (and vast) as well. CVX is a solid energy play, with an enticing dividend of 4.32%.

  3. avatar
    Peter Kilroy Reply July 19, 2017 at 2:59 PM EDT

    Hi John,
    Whats your take on MPLX, is it just as good an investment as MPC? I am thinking that as more refined products are produced at lower prices this sould benefit both co’s.
    Thank You.

    • John Persinos
      John Persinos Reply July 19, 2017 at 5:46 PM EDT

      Peter: MPC subsidiary MPLX LP (NYSE: MPLX) is indeed a good investment and your thinking is correct. MPLX is a master limited partnership (MLP) that operates midstream energy infrastructure assets and as such, I think it faces a promising second half of 2017. MPLX just reported robust operating results and the analyst consensus is that it should generate a compound annual distribution growth rate of at least 20% for the next two years. Just as refiner Marathon should benefit from lower oil inputs for its refining business, MPLX should benefit from consistently prolific North American shale production. The energy sector’s downturn up to the second half of 2016 compelled shale producers to run as efficiently as possible, so they could stay profitable even if oil prices sputter. That’s good news for MLPs such as MPLX, which relies on financially sound producers that have the financial wherewithal to pay for their services.