Luckily, however, we live in a highly globalized word. While domestic demand for gasoline has been falling for the past seven years, international demand has been quite strong. Since 2006, U.S. exports of refined petroleum products have soared more than 120%, fueled by strong demand from Mexico, Canada, and the Netherlands last year. This even allowed the U.S. to become a net exporter of fuel last year for the first time since 1949.
Refining executives continue to be optimistic about foreign markets. According to Anthony Rouse, chief economist at Phillips 66 (NYSE:PSX), “Exports are where the growth is.” Not surprisingly, the spun-off refining company plans to increase its U.S. export capacity by 40% by the end of this year.
Going forward, one of the most important export markets is likely to be Latin America, where demand for refined product has increased from roughly 7 million barrels per day at the turn of the millennium to more than 8.5 million barrels per day in 2011. Within the next decade, experts project Latin American demand to rise to nearly 10 million barrels per day.
3. Cheap natural gas
Low prices for natural gas have also proved a major boon to refineries, as well as for U.S. manufacturing companies. Natural gas, one of the main power sources used by refineries, has seen its price plunge over the past few years, dipping as low as $2 per mcf in early 2012.
Since the largest component of a refiner’s variable operating costs is fuel, cheap natural gas has allowed refineries to realize massive cost savings. For instance, falling prices since 2008 have amounted to savings of $1 billion annually for San Antonio-based Valero.
Final thoughts
To summarize, last year’s solid performance among U.S. refiners was driven primarily by the high WTI-Brent differential, high demand for refined product exports, relatively low energy costs, and a decline in capital spending. Going forward, these trends should continue for at least the next couple of quarters.
This should allow many of the larger refiners, which are generating high amounts of free cash flow, to continue returning cash to shareholders, who are enjoying the trend of dividend increases and share buybacks. HollyFrontier Corp (NYSE:HFC) was especially kind to its shareholders last year, declaring a $0.50-per-share special dividend back in November.
However, despite a favorable backdrop, a repeat of last year’s colossal share-price gains is unlikely. With many refining stocks flirting with their 52-week highs, I would be especially cautious about buying into some of these companies at current price levels.
Refining margins have displayed tremendous volatility over the years, so the price at which one buys is crucially important. With that said, I still think some refiners, especially HollyFrontier, Marathon Petroleum, and Tesoro, have more room to run and could see significant gains over the course of this year. Caveat emptor.
The article 3 Factors Driving Refiners’ Strong Performance originally appeared on Fool.com and is written by Arjun Sreekumar.
Fool contributor Arjun Sreekumar and The Motley Fool have no position in any of the stocks mentioned.
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