A Marathon Play

07/08/2005 12:00 am EST


Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

No special report on energy would be complete without Elliott Gue, who has launched an advisory service devoted exclusively to opportunities in this market. Here, in the latest issue of The Energy Strategist, he looks at a "marathon" runner in refining.

"OPEC uses a basket of several different types of crude as a benchmark for oil prices. Each type of crude trades at a different market price and the cartel changed that 'basket' last week to include several new types of heavy sour crudes. Heavy crudes are more difficult and expensive to refine into useful products like gasoline. And sour crudes contain high quantities of sulphur pollutants that must be removed during the refining process. Sulphur removal also requires additional refining equipment. The fact that OPEC has changed its benchmark basket reflects the fact that more oil coming from OPEC is heavy sour crude. The prized, easy-to-refine Arab light crude is in increasingly short supply right now.

"Few refineries worldwide are capable of refining all these heavy sour crude oils. This is particularly true in Asia; while absolute refining capacity has expanded in recent years, most of this capacity is capable of refining only lighter crudes. The result is a glut of heavy sour crudes and a shortage of light sweet varietals. This refining bottleneck has become so pronounced that some heavy sour crudes are trading at about a $20 or more discount per barrel to benchmark light sweet crude. There are winners in all of this. Some US refiners are the only companies in the world with capacity to refine the cheaper crudes. These firms can buy the crude at a large discount to the oil prices you see quoted on CNBC every day; the gasoline, diesel and jet fuel, however, can be sold at high market prices. Profit margins for the best-placed refiners are exploding.

"As a result, the refinery industry looks more attractive than ever. And the best play on that business right now is Marathon Oil (MRO NYSE), which is among the largest refiners in the US. Importantly, much of its capacity is capable of refining the more complex and cheap grades of crude that are in such ready supply worldwide. The IRS recently cleared a deal that will allow Marathon to complete its purchase of a refining joint venture known as Marathon Ashland Petroleum (MAP). The original agreement to buy MAP was completed more than a year ago but has been subjected to long tax-related delays. MAP will be a big beneficiary of the huge spread in prices between light sweet and heavy sour crudes. In addition to that refining venture, Marathon also has a very attractive exploration and production portfolio. This includes, among other markets, big exposure in the hot African drilling market. One of the larger deals led by Marathon in this market is a liquefied natural gas (LNG) facility in Equatorial Guinea. Marathon is a buy under $55."

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