A Surprising Winner From the Natural Gas Boom: Chesapeake Energy Corporation (CHK), EXCO Resources Inc (XCO)

For San Antonio-based Valero, falling gas prices since 2008 have amounted to savings of $1 billion per year. And as a New York Times article documented, access to cheaper inland oil and lower energy costs have provided Valero’s Three Rivers refinery, located near San Antonio, with about $665,000 a day in savings, which has boosted profit by more than 400% since 2008. That’s no pocket change.

Final thoughts
Natural gas prices almost certainly will rise over the next few years, which would suggest a gradual erosion of refiners’ cost savings. However, even if prices were to rise above $4 per mcf this year and the next, that price level is still significantly below the historical norm. In addition, $4 per mcf natural gas is still substantially cheaper than European and Asian prices and should continue to provide U.S.-based refineries with a major competitive advantage over their foreign peers.

All in all, I think that several American refining companies are still attractive, though I would prefer to wait for a pullback in their share prices, many of which skyrocketed last year. While last year’s phenomenal returns are unlikely to be repeated, the sector should continue to prosper due to a host of positive developments that appear structural in nature.

In addition to cheap natural gas and a Brent-WTI spread that is likely to remain above historical norms, refined product exports should continue to boost refiners’ profits. While U.S. gasoline demand peaked in 2005 and will probably continue to fall, the demand for refined product should continue to grow in the developed world, particularly in Latin America.

The article A Surprising Winner From the Natural Gas Boom originally appeared on Fool.com and is written by Arjun Sreekumar.

Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy.

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