Thinking About Selling Refiners

It was a year ago I bought my refining stocks.  It was a savvy move, even if for the wrong reasons (MFI Diary: Refineries). In that blog I mention three, MPC, HFC and CVI.  I bought all three, but then sold CVI after a month, thinking I had too much overall exposure to the sector.  I would have done well to have held all three (CVI doubled).

But on my original purchase, HFC is up 68% and MPC is up 90%.  Not that having a stock go up a lot is reason to sell.  But I am always a Nervous Nellie around refineries. They are so dependent on the crack spreads, which is essentially the difference between input costs (buying the oil) and prices for the refined products.  The key is that supply in the US of refining products is inelastic (they are not building more refineries), so if demand is increasing (as economy improves), prices can rise more quickly.

So if you look at MPC and HFC, they actually still both look cheap. HFC has an earnings yield of 24% and MPC is around 18%.  They do not get great Return on capital figures as refining is obviously a pretty capital intensive business. One thing not in MPC numbers is the fact that they bought a refinery on the cheap from BP (Marathon Petroleum Corp : Purchase of BP's Texas City Refinery ).  Hmm, that actually looks pretty promising. Maybe I will hold refiners a bit longer. Markets are closed today and everything I am reviewing actually looks promising.