I like companies that generate large amounts of free cashflow. I get excited when shares of a high cashflow look very cheap in relation to the cash being produced by the business.
In short, I like companies that make a lot of money. If you’re like me, consider refining stocks.
Let me show you one of my favorite ones…
Refiners turn crude oil into the fuels that power our economy. They produce gasoline, diesel fuel, jet fuel, and heating oil. These companies face the challenge of having prices of both the raw materials (crude oil) and the finished products set by the trading markets.
As a result, refiners must be very efficient to remain profitable when prices aren’t in their favor. But, during periods when pricing is favorable, these companies will be very, very profitable.
While refining stock share prices may swing with the price of oil, profits come from the difference between the cost of oil and fuel prices. The price difference is referred to as the crack spread. The 3-2-1 crack spread is the most commonly quoted. This spread is the difference between taking three barrels of oil to produce two barrels of gasoline and one barrel of distillate (diesel, jet) fuels. On May 3, the 3-2-1 spread was around $28.00 per barrel. Actual refining margins depend on the sources and types of crude oil purchased and where fuels are sold.
To illustrate how profitable these companies can be, let’s look at some numbers from the 2023 first quarter results from Marathon Petroleum Corporation (MPC). For reference, the Marathon market cap is…
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