Bradley Olson, ©2012 Bloomberg News
Friday, February 3, 2012
Article from San Francisco Chronicle
Feb. 3 (Bloomberg) -- Hedge funds have invested a record $6.5 billion in U.S. petroleum refiners, expecting profit to jump as companies shut aging plants and acquire cheaper supplies of North American crude from burgeoning shale-oil wells.
Barry Rosenstein's Jana Partners LLC and David Tepper's Appaloosa Management LP alone have amassed $1.3 billion of stock, joining funds that together more than quintupled their money in the industry since the S&P 500 Oil & Gas Refining & Marketing Index's eight-year low in the fourth quarter of 2008. The index soared 18 percent this year, beating the 5 percent gain in the Standard & Poor's 500 Index.
Decisions by Royal Dutch Shell Plc, ConocoPhillips and Total SA to shed or shut refineries since 2007 to avoid losses only increased the attraction for hedge funds. They hold a greater percentage of stock in refiners such as Tesoro Corp. and Valero Energy Corp. now than in any other type of energy company, data compiled by Bloomberg show.
"We recognize that the refinery business is cyclical and notoriously difficult to model," Rosenstein said in an e-mail to Bloomberg. "But at the moment we see a very big opportunity for refineries situated in the mid-continent, who are major beneficiaries of the oil production boom going on today in the U.S."
North Dakota's Bakken is the center of that boom. Production has more than tripled since 2008, according to data compiled by Bloomberg, because of drilling techniques including hydraulic fracturing.
Higher Output
In fracking, as the practice is known, a mixture of water, sand and chemicals is shot underground to blast apart rock and free fossil fuels. Higher output has depressed the cost of crude for refiners operating in the mid-continent, near the new wells.
Jana Partners, based in New York, bought $636 million of Marathon Petroleum Corp. last year and the investment has climbed almost 30 percent, boosted by the refiner's announcement this week that it would buy back as much as $2 billion in shares and consider spinning off its pipeline assets.
Hedge funds are still building up stakes, expecting that consolidation among refiners will spur a share rally as plant closures reduce supply, boost profits and spur asset spinoffs, said Christian O'Neill, an analyst with Bloomberg Industries.
SAC Capital Advisors LP, D.E. Shaw & Co., activist investor Carl Icahn's Icahn Enterprises LP are among funds that bought 10 percent or more of the shares of targets including HollyFrontier Corp., CVR Energy Inc. and Western Refining Inc. at a time when the world's biggest oil companies from Exxon Mobil Corp. to BP Plc are reducing their holdings or exit the business.
Hedge Fund Stake
The 12 percent stake hedge funds hold compares with their stakes of about 6.9 percent in companies on the S&P 500 that explore for and produce oil and natural gas. Hedge funds hold 2.6 percent of the shares of utility companies on the index and 1.8 percent of so-called integrated companies including Exxon and Chevron Corp., according to data compiled by Bloomberg.
The funds have disclosed their shareholdings in filings with the U.S. Securities and Exchange Commission since Sept. 30.
"Refiners are catching up to the energy rally of the past few years," said Sam Margolin, an analyst with Global Hunter Securities LLC in New York. "The rising tide of oil and gas drilling in North America has lifted everybody, and refiners are catching up in terms of exposure."
Appaloosa bought 17.9 million shares of refiners, including CVR Energy, HollyFrontier and Valero, and benefited in the second quarter of 2011 when U.S. crude prices began to fall behind the global Brent benchmark amid increasing production, boosting refiners' share prices, according to data compiled by Bloomberg.
Record Difference
The difference between the two kinds of oil reached a record $27.88 on Oct. 14, giving refiners with operations near U.S. oil basins the advantage of paying less for each barrel they purchased.
The advantage for Midwest refiners has diminished so far this year, with the spread narrowing to an average of $11.48 in 2012, a 27 percent decline from 2011. Excluding last year, the differential remains higher than in every quarter since 1988, according to data compiled by Bloomberg.
CVR Energy, in which Icahn bought a stake of more than 14 percent stake in January, rose 23 percent in 2011. Western Refining rose 26 percent, according to data compiled by Bloomberg.
Refiners gained as they shut facilities to counter reduced demand int he U.S. and western Europe. Petroplus Holdings AG, a European refiner that has filed for insolvency, has shut three of its five plants and has reduced production at the others.
Hovensa LLC, a partnership of Hess Corp. and Petroleos de Venezuela SA, will shut its St. Croix refinery in the U.S. Virgin Islands by mid-February. Valero has reduced production at its Aruba plant.
Refinery Closures
Sunoco Inc. and ConocoPhillips closed refineries near Philadelphia in the fourth quarter of 2011 and Sunoco plans to shut another by July if it isn't sold.
The closures and potential shutdowns represent more than 2 million barrels a day of refining capacity, enough to boost gasoline prices and profits for refiners in Europe, the U.S. East Coast and on the Gulf Coast that remain in operation.
"That's all leaving the market in a relatively short period of time," Bloomberg's O'Neill said. "You're really making a bet that with all this capacity coming out, there's going to be tightness in supply."
Plant closures and sales come as companies including Marathon and ConocoPhillips spin off refining units and streamline their corporate structure.
Jana Stake
Jana Partners, which took a 5.5 percent stake in Marathon Petroleum, urged the company to get rid of unrelated assets. Less than two weeks later, the company announced plans to buy back as much as $2 billion in shares and consider an initial public offering for its pipeline assets that could fetch $6.2 billion, according to Macquarie Group Ltd.
Corporate restructuring to exit refining or spin off separate business units may bring big payoffs even from companies that lose money.
Sunoco, which had more than $1.32 billion in losses during the first nine months of 2011, has surged 28 percent including its spinoffs since Jana bought shares in the first quarter of 2011.
--With assistance from Aaron Clark in New York. Editor: Jessica Resnick-Ault, Todd White
To contact the reporter on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net
To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net
Article from San Francisco Chronicle
