The Mid-continent Refiners

I believe there is a significant opportunity in the US refiners. My list includes :

MPC The refining spinoff of Marathon Petroleum. This is my favorite.
CVI CVR Partners refining business. This also has a fertilizer component, which this blog has talked about extensively
SUN Sun Oil, which has recently spun off its coke business and is now more of a pure play.

The basic theory here is one of increasing US crude production between the Rockies and the Appalachians. Most of this is currently traditional oil. Over time an increasing percentage will be shale oil, as the technology of fracturing ever more viscous hydrocarbon improves. The result of this has been an oil "lake" in the nations's interior, somewhat similar to the natural gas "bubble" in North America. A result has been much lower prices in this region. Most of this blogs' readers have noticed this as the Brent - WTI spread. In fact, it is really the mid-US - rest of world spread. This has led to much lower input costs for refineries in this area.

Additionally, this is an out-of-favor industry. The prevailing theory is that US oil demand will fall over the coming years because of higher prices, lower growth and inroads from alternate fuels. This will make many refining assets surplus.

I don't buy this. As long as the low-priced crude is available, it makes sense to refine it. True, some of the refined products will have to be shipped to the east coast, reducing net backs. Still, the sum will be quite positive to the refiners. Also, it makes sense on a worldwide basis for US cat cracking to be used for export products to high gasoline growth parts of Asia.

-- more to come --