{"id":16502,"date":"2023-05-31T23:36:22","date_gmt":"2023-06-01T03:36:22","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/the-dividend-investors-oil-playbook-part-2-nysempc\/"},"modified":"2023-05-31T23:36:23","modified_gmt":"2023-06-01T03:36:23","slug":"the-dividend-investors-oil-playbook-part-2-nysempc","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=16502","title":{"rendered":"The Dividend Investor’s Oil Playbook – Part 2 (NYSE:MPC)"},"content":{"rendered":"
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Thesis<\/h2>\n

In Part 2, we will be expanding on the thesis laid out in Part 1 for dividend investing in the energy industry. In Part 1, we examined what I called the offensive line. These were companies who’s profitability was materially immovable based on commodity prices.<\/span><\/p>\n

In Part 2, we are looking for a versatile running back to consistently hammer out gains and achieve the same goals laid out in Part 1.<\/p>\n

1. Provide a steady and reliable income stream<\/p>\n

2. Protect invested capital from market downturns<\/p>\n

3. Cues to call an audible and restructure the portfolio to lock in gains and protect the income stream.<\/p>\n

The Running Back<\/h2>\n

This position needs to do it all. Run, block, and catch. By doing so, these companies should be able to have multiple streams of earning potential. Having a blend of upstream, midstream, and downstream allows the portfolio to have options when the industry is in a downturn. Additionally, these stocks should have a sizeable back stop of cash as a rainy day fund. Here are my top two picks to fill this jack of all trades position. I target 25% to 35% of my portfolio for this segment.<\/span><\/p>\n

The Refiner’s Edge<\/h2>\n

Due to a lack of investment over the last 5 years, the refinery industry is wholly undersupplied from a capacity standpoint. This has raised margins for all refiners and the industry has put out fantastic numbers for the last several quarters. One of the important aspects to remember when investing in a refiner is that profitability is tied to crack spreads, not the price of crude. But it still trades with the price of crude. This is where we get to make intelligent investing decisions.<\/p>\n

Right now, with crude prices falling into the low $70\/barrel range, all energy stocks are depressed. This comes at a time when profitability is hitting on all cylinders for refiners. Investors can be taking advantage of the disconnect between profitability and share price with confidence. As crude prices fall, so do prices at the pump. This helps to spur demand for refiners’ products and keeps crack spreads elevated.<\/p>\n

As you can see below, crack spreads for RBOB gasoline in 2022 and to date in 2023, are well ahead of the previous 5-year average. This is mainly driven by lack of supply in the refinery market. In addition, the current gasoline reserves are very low, well below the 5 year average. Both of these factors increase the demand for refiners’ products, and in turn, profits.<\/p>\n

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\"RBOB<\/span>
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EIA<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Gasoline Inventories<\/strong><\/p>\n

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\"US<\/span>
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EIA<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

One of the other major products refiners create is distillate, which is a general grouping for heating oil and diesel fuel oil. While distillate makes up a small percentage of the market, it exhibits higher and more consistent margins. This consistency is aided by the balanced demand for the product. Diesel fuel used for transportation of goods and is generally in consistent demand and not heavily relied on for people’s summer vacation plans. Additionally, swings in the fall\/winter for heating oil are balanced by increased diesel demand in the spring\/summer to support farming.<\/p>\n

2022 was an enormous year for diesel production. The spreads were 2x-2.5x the 5 year average for most of the year. As we have come into 2023, the diesel spreads have come back down more toward normal levels. This is mainly attributed to the mild winter experienced in 2022.<\/p>\n

The consistent higher margins are leading to increased investment in the diesel market. Multiple refiners are engaging in redevelopment projects to create renewable diesel fuels. The feedstock for these refineries will use cooking oils, canola, or soybean oils, and thus is entitled to the associated LCFs and RINs that are awarded to a green fuel source. As the industry moves to more bio-based refining, the additional revenue streams generated by green credits may offset margin loss as the supply\/demand imbalance corrects itself as more diesel refining capacity comes online.<\/p>\n

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\"Distillate<\/span>
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EIA<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

We Want More<\/h3>\n

Being a refiner alone won’t be enough to warrant our investment dollars, however. Having high levels of profitability now is great, but what if the supply and demand fundamentals shift? We want consistent cash generation, not just a different kind of volatility. Selecting companies that have more than one leg to stand on for profitability will be the backbone of our selections. Let’s get started with my top picks for the running back position.<\/p>\n

1. Phillips 66 (NYSE:PSX<\/span>)<\/h3>\n

Phillips 66 checks a lot of the boxes for being a versatile performer, participating in both the midstream and downstream markets. The company is mainly a refiner, generating 55% of its pre-tax profit from this segment (based on Q1 results). Beyond that, it has midstream, chemical, and marketing\/retail segments to round outs its earnings levers. All of this is coupled with a 4.5% yield.<\/p>\n

<\/span><\/p>\n\n\n\n\n<\/colgroup>\n\n\n\n\n\n
Segment<\/strong><\/td>\n Income – Million <\/strong>(Before Tax)<\/strong> <\/td>\n % of Total <\/strong>Income<\/strong> <\/td>\n<\/tr>\n
Refining<\/td>\n$1,608<\/td>\n54.8%<\/td>\n<\/tr>\n
Midstream<\/td>\n$702<\/td>\n23.9%<\/td>\n<\/tr>\n
Marketing<\/td>\n$426<\/td>\n14.5%<\/td>\n<\/tr>\n
Chemicals<\/td>\n$198<\/td>\n6.7%<\/td>\n<\/tr>\n<\/table>\n

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