Christian DeHaemer’s Bull and Bust Report ($99/yr) is out with a pitch about “Chaos in the Global Shipping Markets” that has gotten the attention of a bunch of Gumshoe readers — and it is based on something real that’s happening, so I thought we’d dig in and take a quick look today.
The spiel is, of course, over the top — here’s a bit:
“This probably won’t shock you, but unelected global bureaucrats are about to screw it all up, yet again.
“They have changed the rules and are about to cause unprecedented disruption around the globe.
“The world economy faces an economic crash of horrible proportions, and it will start in just a few months.”
And there’s some really incredible hyperbole here, none of which is anywhere near “mainstream” thinking about this issue…
“A supply shock in what is known as ‘Gasoil’ will cause chaos in the world’s agricultural, trucking, railroad, and shipping industries. As you know, global economic activity is already slowing, but this will push it over the edge.
- In many parts of the world, trade will simply stop.
- The cost of food will surge as farmers, unable to pay for fuel, cut back on planting.
- Raw goods to factories and finished goods to retail stores will slow or stop all together.
- Vehicle sales will plummet, especially big trucks and SUVs. At least one major U.S. automaker will go under unless bailed out.
- Millions will lose their jobs and their houses just like in 2008.
- Divorce, drug addiction, and suicide rates will skyrocket.”
All this because prices might go up for a while? That seems a bit excessive. So what’s the story? More from DeHaemer:
“Years ago, when no one was paying attention, the IMO quietly instituted a new rule that goes into effect in just a few months, on January 1, 2020.
“It will cause a massive spike in gasoil.Are you getting our free Daily Update
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“You see, under this new regulation, the big ships that crisscross the world’s oceans, delivering all of the world’s cargo, must stop using a grade of fuel called ‘bunker fuel.'”
That’s true, the IMO is requiring that ships stop burning high-sulfur fuel, because that’s a major contributor to air pollution and has an outsize impact on population areas in coastal areas and near ports. The rule is that ships will have to stop using high-sulfur fuel (3.5%, the previous limit) and begin using fuel that has a sulfur content below 0.5%. That’s a little bit exaggerated, since the average “low quality” fuel used for this is now down to about 2.5%, but it’s still a big change.
And, yes, the change does come on January 1, though it has been in the works for more than a decade… and it has been clear that it can’t be postponed or renegotiated for about six months, though some folks had held out hope that the trade war kerfuffle would cause governments to agree to a postponement. And it might be that parts of the impact are functionally postponed, of course, since this is a global agreement made by treaty, but enforcement is up to individual member countries in their territories and with their fleet, but the major energy and shipping companies and associations have been moving forward with the assumption that the rules will change on January 1, as planned, and they have to be ready.
More hype from the ad:
“Four million barrels of oil a day is a massive amount. It’s more oil than Canada, Iran, or Kuwait produces. There is no way it can be replaced easily, if at all!
“But that’s what must happen unless you want the global economy to come to a dead stop. It’s a truly horrifying scenario.”
I don’t know if “replace easily” is a reasonable criteria, but diesel fuel (“gasoil”, which is used as a benchmark for a lot of similarly-refined fuels) is a huge market — the demand for gasoil has been growing and is somewhere near 30 million barrels/day, so adding some to the demand because shipping has to shift much of their current 4 million barrel use from high-sulfur bottom-of-the-barrel stuff to more refined gasoil will certainly impact prices… but one wouldn’t think it would lead to global poverty and rioting in the streets, particularly since the refineries responsible for production of these fuels have known about the change and the expected demand increase for more than a decade.
Here’s more from the ad:
“IMO 2020 Oil Shock
“Some analysts are calling it the ‘shipping Y2K.’ Others say it will be trade armageddon.
“CEOs in the oil patch assure us fuel prices will surge. Some industries, like airlines and trucking, who use the bunker fuel replacement gasoil (or 0.5% sulfur fuel), will run out altogether.
“And this won’t be a one-day event. Disruption could last years because most global shippers will have to change their engines to consume the new fuel or install multimillion-dollar devices called ‘scrubbers’ that can take the old fuel.”
That “Shipping Y2K” might be an apt moniker, by the way, in that this is something that some people are freaking out about… but it probably will have temporary impact on volatility and be absorbed by the market within less than a year (that’s just my guess, to be clear, from reading up on the topic, I’m not saying there’s a zero chance of catastrophe… just a low chance, because the people involved in this industry are NOT facing shock or surprise, they’ve known this was coming for a long time).
But yes, it should mean that business improves for some refiners — they won’t have a customer for high-sulfur fuel anymore, but they’ll have more demand for more expensive products.
Which, of course, is when we begin to get to the hints about what kind of investment this ad is recommending…
“A few farsighted refiners have begun building inventories of low-sulfur fuel in the U.S. As of last month, low-sulfur stockpiles were 9% higher than a year ago.
“Demand is picking up. Oil with 0.5% sulfur is now more expensive than Brent crude in northwest Europe for the first time in years. Speculators are stockpiling the fuel in floating tanker ships waiting for a massive payout in two months.
“By January 1, 2020, there is no telling how high the price of 0.5% sulfur fuel will go! Some are predicting $200 a barrel. That’s a 63% increase and a $145 price gain from where we are today.
“Pure-play refiners operating sophisticated high-tech plants called “complex plants,” with hydrocrackers and hydrotreaters that can remove the high-sulfur fuel, will be the big winners in the IMO 2020 oil shock.”
The $104,000 number that he teases in the headline seems to have just been pulled from a historical example from the last oil boom…
“In January 2002, the price of oil was at $28.23. Over the next few years, it started moving up. By June 2008, it was trading at $164.08.
“The price spike was the direct result of a supply shock because investors thought the world was running out of oil. In the years before fracking, the world really was running out of oil. Production couldn’t keep up with demand.
“In this bullish environment, one refiner, Valero Energy Corp. (NYSE: VLO), climbed from $6.95 to $72.59, a 1,044.46% gain. A $10,000 investment would have tuned into $104,000 on the share price alone.”
Those numbers look about right… but the one thing about historical outperformers is that they’re a LOT easier to find than future outperformers.
DeHaemer can’t resist putting some anti-UN jibes in there, since he knows that railing against globalism and environmentalism is a quick way to get the average newsletter subscriber on his side, and once you’re on his side then you might not think as critically about the financial offer he’s making to you (the average target of newsletter ads is a 50-70 year old affluent white guy, which is also a group that skews political to the right), but that’s mostly just chatter to rile you up.
And then, finally, we get a few hints about the stock he recommends…
“I’ve found one company that will make money hand over fist when the IMO 2020 rule takes effect. In fact, even without the IMO 2020 event, this company makes you money.
“It has NEVER missed a dividend payment and will pay out $1.1 billion this year alone.
“In all my 22 years in the markets, I’ve never seen an opportunity quite like this.
“Best of all, the payouts have increased every single year….
“And that’s without the massive catalyst of the IMO 2020 oil shock event.
“This could very well be the single best way to make $104,000 plus bank extra cash in the form of dividends, cash you’ll be able to rely on year in and year out.”
OK, so that’s a good bit of clues… what else do we learn?
“One company you have to know about could have the most upside. It is sitting right in the middle of the largest light, sweet crude oil field in the world in Texas. Its refineries are near the coast and have geared up for the January 1, 2020 payout.
“It’s as pure an IMO 2020 profits play as you can get.
“Even before the end of the year event, this company has consistently increased its cash payout by 25% a year for the last eight years.
“You can expect those increases to double, triple, or more because of the IMO 2020 0.5% sulfur cap!
“We are not just talking about a one-time price spike, but a long-term permanent change to the cost of 0.5% sulfur fuel. Due to high costs and NIMBY rules, new refineries are almost impossible to build. The last oil refinery with significant output, Marathon’s facility in Garyville, Louisiana, came online in 1977 — that’s 42 years ago!”
So what’s the stock being teased? If that’s all about one company this is almost certainly, sez the Thinkolator, Phillips 66 (PSX), which is one of the larger US refinery companies. Phillips 66 was spun out of ConocoPhillips seven or eight years ago, and also owns part of Phillips 66 Partners (PSXP) and DCP Midstream (DCP), which are both MLPs that own some of the midstream assets, including pipelines that feed PSX’s refineries.
Phillips 66 will actually probably pay out more than $1.5 billion in dividends this year, so that’s not a very precise match, but the chart of annual dividend growth that DeHaemer provides, indicating 27% CAGR in the dividend, is an exact match for PSX’s history as a separate company. Right now, it’s paying a 90-cent quarterly dividend and yields about 3% at $117 a share. And the stock has been surging in the past few months, perhaps partly because of investors trying to position themselves for this IMO 2020 changeover (there was also a nice jump after they reported earnings in late October, beating estimates and raising investor expectations for the fourth quarter).
In case you’re curious about the business, these are the other big US-focused refining stocks that are independent (ie, not owned by ExxonMobil or Chevron or the other major integrated oil companies who actually do most of the refining in the US):
Marathon Petroleum (MPC) (also has a MLP, MPLX)
Valero Energy (VLO)
HollyFrontier (HFC) and their MLP, Holly Energy Partners (HEP)
PBF Energy (PBF) and their MLP, PBF Logistics (PBFX)
PSX and VLO have been by far the strongest performers in that group this year… but the only one that looks to me like it might be slightly more appealing than Phillips 66 as a play on this IMO 2020 plan and the attendant increase in demand for diesel/gasoil, is PBF Energy (PBF), in part because it’s trading at a lower valuation and hasn’t shot up quite as much recently. In truth, though, all these refiners have been preparing for this 2020 demand, with substantial earnings growth anticipated. Phillips 66 is expected to return to growth next year after a weak 2019, with a 2020 earnings estimate of $10.80, so that’s a forward PE of about 11… PBF’s forward PE is about 6, HFC and VLO have forward PE ratios of 10, MPC is at 9. They’re all cheap on the face of it, as befits cyclical companies who have had a down year and made less in 2019 than they did in 2018.
There’s a nice overview of these stocks in this Motley Fool “investor’s guide to refinery stocks” article, though it’s a few months old and doesn’t go into the IMO 2020 stuff specifically.
And as a point of interest, Warren Buffett’s Berkshire Hathaway (BRK-B) has been a substantial holder of Phillips 66 for many years… but over the past couple years they’ve been steadily selling down the position, so they only own about 1% of the company now.
The biggest risk here is probably that this is not “new news” — yes, demand for low-sulfur fuels should benefit the refiners who’ve been preparing for this (for years, in some cases), but this is not a surprise or a wild new change… it’s something that has been clearly coming for at least several years and has technically been in the law for more than a dozen years, and it has been clear for at least three or four months that there will be no official delay to the IMO implementation (the refiners who’ve invested heavily to prepare are also a little worried that a Trump tweet might derail implementation somehow, but most people seem to expect the change to go through as expected, cause some market gyrations for a few months as shippers and fuel providers adjust, but not be scrapped or delayed).
And as is always the case with big market shifts like this, investors have been thinking about it and trying to “play” the new rules for at least a year… so this isn’t something where major companies and investors are suddenly sitting up, six weeks before the rules change, and saying, “hey, shouldn’t we get ready?”
That doesn’t mean the earnings won’t go up for the refiners… but it does mean they’re already expected to go up, so, to some degree, that expectation is already in the share price. If everyone knows it’s coming, even if for a while there was some uncertainty about whether it might get delayed or adjusted, then it’s not a “shock” and it’s unlikely to cause nearly as much “chaos” as a newsletter pitchman would like you to think.
If you’d like a little background in IMO 2020, there’s a good quick article from Hellenic Shipping News here, and an interesting Reuters story about all the hedge fund gambles being made on this regulatory change here. The oil industry press was talking about the confidence in the industry that they’d have enough fuel on hand for shippers back in February, despite the fact that energy industry analysts were worried. And in case you’re thinking that this is all brand new and exciting and this newsletter is your only path to this exclusive knowledge, rest assured that it has been widely covered in the mainstream investing press — there was an article called “Refiners Poised for Boost from Clean-Fuel Rules” in the Wall Street Journal way back in May, and yes, there’s been plenty of talk from each of the refiners about what they’re doing — Phillips 66 has been talking about the investments they’re making in their conference calls and presentations since at least the summer. PSX hosted its Investor Day a couple weeks ago and did mention that they are “well-positioned for IMO 2020,” though it was not the overwhelming focus of the company by any means.
So don’t ignore the idea — the refiners are kind of appealing right now, I’d agree — but temper your expectations. There is also an ETF for this sub-sector, in case you’re interested in dabbling in the “story” but don’t want to pick and choose among the stocks — that’s the Van Eck Vectors Oil Refiners ETF (CRAK), which includes all the names I mentioned above but also is much more international, which might be of some benefit because these are international rules and it’s not just the US-centric refiners who will benefit (the ETF is about 30% US, 30% Europe, 40% Asia, though many of these companies also operate in more than one region). Like a lot of these niche ETFs, it’s quite tiny, trades in very low volume, and is relatively expensive (0.6% expense ratio) so it might not survive, but I like the idea of it.
And with that, I’ll leave you to your own research and decisionmaking — please do let us know if you’re betting on this IMO 2020 change, or find PSX or one of the others more appealing than the rest, just use our friendly little comment box below.
P.S. For those who feel the urge to rush and are overwhelmed by DeHaemer’s arguments, I’d just note that it’s worth taking your time to think it over, and try to think of the companies themselves without letting the daydream of riches and the pitch language from the ad float around in your head… the copywriters are great at making that first impression to give you a strong FOMO feeling about impending riches, but if you need a “buzz kill” on that front you can just look at the “Coal Contracts” that DeHaemer was convinced would make you rich back in March as Trump was “winning” the trade war with China. I left out one of those stocks below, the one that had already declared bankruptcy by the time the ad reached us, but the other three have suffered mightily as coal continued its decline — this is their total return since then…
That doesn’t mean oil refining is a bad investing idea, or that these companies won’t do well in the next six months… just want to insert a little skepticism there to help you keep your head in balance. Good luck!
Disclosure: Of the companies mentioned above, I own shares of Berkshire Hathaway. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.