Tag Archives: crak

Refined Approach To Energy ETFs

Oil refiners could outperform in energy space. Widening spread between crude and refined products help support refiners. An ETF option that tracks some strengthening oil refineries. In the energy space, oil refiners and sector-related exchange traded fund could outpace the big oil and services names as refineries capitalize on the cheap crude oil and higher prices on refined products. Investors interested in tracking the oil refinery space can take a look at the Market Vectors Oil Refiners ETF (NYSEArca: CRAK ) , which began trading in August. CRAK has gained 3.6% over the past month. “Refiners have been the lone bright spot in the energy sector during the past year, handily outperforming every other subsector,” writes Allen Good, who is a senior equity analyst for Morningstar . “While oil prices have deteriorated, refining margins have improved, thanks to strength in gasoline margins due to key refinery outages and strong demand.” Gasoline demand, which is nearing its 2007 record high, and supply disruptions from refinery outages have bolstered gasoline margins about 50% this year. While we are at the end of the summer driving season, Good expects demand growth outside of normal seasonality, thanks to help from cheap oil prices. Good also projects improved earnings in the refining space as short-term investments. Oil refiners have not taken large, capital-intensive expansions or acquisitions. Instead, companies have capitalized on the availability of discount crude and natural gas or improving yields. “These projects typically require much less capital (processing capacity is much cheaper for light crude than heavy crude), have short payback periods, and generate attractive returns,” Good added. “Thanks to the completion of many of these projects, as well as improved operating performance, refiners can generate earnings growth in a flat-margin environment.” For example, Tesoro (NYSE: TSO ) shows ongoing improvement and is adding integration programs in California. HollyFrontier (NYSE: HFC ) is investing in improvement projects. Marathon Petroleum (NYSE: MPC ) added increased condensate processing, distillate production and exports. Western Refining (NYSE: WNR ) invested in logistics projects. CRAK includes a 5.5% tilt toward TSO, 5.0% in HFC, 6.9% in MPC and 3.4% in WNR. Refiners are also investing in midstream assets, which can provide earnings and achieve higher midcycle returns, with less volatility, Good said. 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. CRAK’s underlying index shows a 30-day SEC yield of 1.51%. Disclosure: None. Max Chen contributed to this article .

Addicted To Energy Investing, Like CRAK

Summary Refineries have been the one bright spot for oil and gas investing lately. A new ETF captures the investment trend but still requires considerable monitoring by the investor. CRAK offers both U.S. and global refiners exposure, which offers diversification but also additional information needs. I couldn’t help myself, a chance to add levity in the face of oil market woes and gyrations. Then it appeared on my radar. CRAK . No, not the “Breaking Bad” sort, but the recently launched ETF. We know how horribly the oil and gas sector has fared, save the refiners. Well now you can own a “slice” of CRAK for your energy or retirement portfolio. I acknowledge the ETF trading issues revealed in the last couple of weeks as markets took a dive, hence the slice approach to this segment for the non-fainthearted. The fund Market Vectors Oil Refiners ETF ((Pending: CRAK )) launched 8/18/2015, right in lock step with the observed trend that refiners were performing better than other energy sub-sectors. (click to enlarge) Source: here . What are drivers? One driver behind the profitability in the sector is lower oil prices. Lower oil prices result in lower input prices, which can lead to higher margins. The fund says, “Unlike other energy sector segments, oil refiners may benefit from lower oil prices if crack spreads remain attractive.” Crack spreads are the differentials between oil prices and the refined products. In the U.S., product growth have been playing a role as well. Furthermore, the U.S. Energy Information Administration (NYSEMKT: EIA ) says: (As of July EIA estimates) that refinery runs will average 16.7 million b/d from April through September and then decline slightly in the fourth quarter to 16.2 million b/d before falling further to 15.8 million b/d in the first quarter of 2016. Following the winter period of lower demand and refinery maintenance, EIA’s expects U.S. refinery runs will reach new highs next summer, averaging 16.9 million b/d in third quarter of 2016. Low oil prices are expected to keep demand for gasoline slightly increasing in 2016. Recent EIA U.S. crude production estimates suggest slightly lower production but prices are expected to stay soft longer than previously expected given overall anticipated global supply. The EIA notes in a May report that increasing U.S. shale oil production is expected to lead to a decline in crude imports, an increase in refinery runs, new investments to expand refinery capacity, and higher crude and refined petroleum product exports. This is the expectation to the year 2025 under three general scenarios: 1) Low crude production under current export restrictions (10.9 million bbl/d in 2025) 2) High crude production without export restrictions (14.7 million bbl/d in 2025) 3) High crude production with current export restrictions (14.7 million bbl/d in 2025) The cases follow, in order from left to right: (click to enlarge) About CRAK The fund tracks the pure-play index (MVCRAKTR) comprised of companies that generate at least 50% of their revenue from crude oil refining, including oil, naphtha and other petrochemicals. It tracks the performance of the largest and most liquid companies in the global oil refining segment. The global firms included in the tracked index come from the following countries: Another way to view these country weightings is based on their expected growth rates, or GDP. This offers an indication as to whether these segments have growth prospects within a country context. Estimates for the U.S. are 2.4% for 2015; Japan 0.8%; India 7.5%; S. Korea 2.6%; Poland 3.4% and Taiwan 3.4%, to name a few (source: The Economist, Sept. 5, 2015, p 88). Thinking about this another way, the ETF offers exposure to energy-related infrastructure in economies with reasonable growth, for now. But it’s a little more complicated than that. Specific companies included in the index: (click to enlarge) Source detail: here . Considering the five U.S. refiners – Phillips (NYSE: PSX ), Marathon Petroleum (NYSE: MPC ), Valero Energy (NYSE: VLO ), Tesoro (NYSE: TSO ) and Holly Corp (NYSE: HFC ) – let’s look at their performance at a time of rising oil prices from 2013 to the peak of July 2014, and then down. (click to enlarge) Bloomberg offers a view of Reliance Industries vs. Phillips and Valero. (click to enlarge) This table shows the performance of the tracked index in comparison with FRAK , just for grins, as of 9/09/2015. (click to enlarge) (click to enlarge) Source: here. Findings I understand the immediate appeal of a swathe of exposure to the better performing segment of the oil and gas industry. The first performance chart is no longer the whole story however, given a nearly 6% decline in the last month for CRAK’s tracker index, MYCRAKTR. Some recovery is evident from the index performance above. While I have illustrated a broad brush stroke of the dynamics related to an ETF approach and refiners, serious complexity is involved in these dynamics. For example , from the EIA: Higher demand for gasoline is supporting these margins (from years of higher distillate crack spreads followed now by gasoline). U.S. gasoline product supplied is up 2.9% through the first five months of 2015; demand is also higher in major world markets such as Europe and India so far this year compared with 2014. Total U.S. petroleum product supplied (a proxy for demand) is up 2.5% through the first five months of the year compared with 2014… (Net) exports are 19% higher this year through May. Thus, investors interested in this ETF approach need to be monitoring variables such as oil prices, crack spreads, product exports and both domestic and global economic demand forecasts, at minimum. Some suggest that refinery investment exposure belongs to the traders owing to cyclicality, and one can see why this is so. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Consider Adding Some CRAK To Your Portfolio.

Summary The Market Vectors Oil Refiners ETF launched this week is a compelling play in the energy sector. I conduct a review of the ETF itself and the opportunities & risks associated with the ETF. I believe CRAK is worth considering because of its strong performance in comparison to other energy segments. In this article, I will be reviewing the new Market Vectors Oil Refiners ETF (Pending: CRAK ), which launched yesterday. I believe investors should consider adding some CRAK to their portfolio because the refiners have been the lone bright spot over the last year when oil prices have collapsed. The following chart from the CRAK fund profile page shows that refining and marketing stocks are the only sub-segment of the energy sector (NYSEARCA: XLE ), which has posted a positive return over the last year. Crack Spread One of the most important things to consider when looking at refining stocks is to look at the crack spread. The crack spread is the difference between the cost purchasing the crude oil and the price of the products that the crude oil is refined or “cracked” into. I created the following chart using the ThinkorSwim platform that has the crack spread plotted over the last two years, as well as the performance of Valero (NYSE: VLO ), which is one of the largest holdings in CRAK. The chart shows that over the last two years Valero’s performance [Blue Line] has been highly correlated to the crack spread. (click to enlarge) [Chart from ThinkorSwim Platform] Opportunity The opportunity for refining stocks is promising because crack spreads are higher than a year ago, which will show up in the form of year/year earnings growth. In a troubled energy environment where oil companies/drillers etc cannot earnings, the refiners stand out above other energy segments. Using Valero as an example, you can see in the chart below for the last four quarters, EPS has been trending upward, even as oil prices had fallen to near $40, went back to $60 and are now back at $40. As long as the crack spread remains somewhat stable at these elevated levels, the refiners will continue to outperform the rest of the energy sector. (click to enlarge) Risks The primary risk of CRAK is that it is highly concentrated within its top 10 holdings. The top 10 holdings account for nearly 65% of the portfolio, therefore when considering CRAK investors should be comfortable with this fact and the underlying companies that are in the top 10 holdings. Second, another item to watch for is currency risk. As the following chart from the portfolio analytics section of the CRAK fund page shows, CRAK has a large international currency exposure. With nearly 50% of CRAK priced in foreign currencies investors who are also, bullish on the dollar could potentially pair a purchase of CRAK with the small-hedged position in the PowerShares DB USD Bull ETF (NYSEARCA: UUP ) or the WisdomTree Bloomberg U.S. Dollar Bullish ETF (NYSEARCA: USDU ) to mitigate the foreign currency risk. Closing Thoughts In closing, because CRAK just launched this week and I believe it should be added to investors watch lists for a period to make sure there is interest in the product. If there is adequate volume and CRAK attracts assets the refiners are a compelling choice when considering investing in energy because they have performed very well during this tough energy environment in comparison to other energy sector segments. Disclaimer: See here . Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Share this article with a colleague