| MRP
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McAlinden
Research Partners
| THEME TRACKER
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Staying Long US
Refiners and Closing Oil Services over Drillers
Oil Services over Drillers launched July
30, 2014 and closed July 10, 2015. Refiners over Energy launched March
2, 2015.
A
lot has happened since OPEC decided against cutting production last
November: oil prices dropped, US rig counts plunged, and the global
energy sector has seen a profit squeeze. One thing that hasn't happened:
a plunge in US oil production. Instead, producers are boosting
productivity of existing wells and refracking old wells, supporting
robust US output and adding to the global surplus. Meanwhile, while
prices have been wobbly lately, they are off the spring low and drillers
are thinking about starting new wells, as detailed in today's Daily
Intelligence Briefing. That prospect leads MRP to recommend closing its
theme to be long oil services against the drillers while maintaining a
long on refiners.
When launching the oil services theme a
year ago, at a time of relatively high oil prices, MRP focused on
two discontinuities that would benefit the group: new rules in the US
and Canada to dampen volatile gases in oil shipped by rail and a shift
in US government policy to tacitly allow the export of lightly refined
crude oil. As oil prices rolled over last year, all stocks in the energy
sector took a hit, but the oil services group outperformed the drillers
on the short side of the theme as rig counts plunged.
US OIL SERVICES HAVE OUTPERFORMED DRILLERS
...
Source: Bloomberg, McAlinden Research
More recently, however, the rig count has stabilized and is beginning to
turn back up. In light of that inflection point, MRP is recommending closing
the combined basket to be long oil services and short the drillers.
... BUT THE RIG COUNT IS TURNING BACK UP
Source: Bloomberg, McAlinden Research
Meanwhile, MRP is staying with the refiners. At the time the theme was
launched on March
2, 2015, MRP noted that "US refiners stand to benefit from the
difference between US and global oil prices, which MRP expects to continue
at least through the next two quarters and therefore recommends going long a
basket of refiners for investors with relatively shorter time horizons.
However, we expect more than the usual volatility: oil prices could reverse
and the outbreak of strikes at some refiners could spread. A short on the
XLE energy ETF can help offset some of the market volatility."
US REFINERS CONTINUE ARE OUTPERFORMING THE
ENERGY SECTOR ...
Source: Bloomberg, McAlinden Research
Sure enough , after a spring bounce, oil prices have again softened.
However, global Brent prices remain higher than in the US, as measured by
West Texas Intermediate. While the spread is at the lower end of where it
has been in recent years, it remains positive and continues to provide
US-based refiners with a competitive edge relative to their global
competitors.
... BENEFITING FROM US OIL PRICES REMAIN
BELOW THE GLOBAL BENCHMARK
Source: Bloomberg, McAlinden Research
Last
updated July 10, 2015
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