This article originally was restricted to the Stock Gumshoe Irregulars when published in October, but was opened up to public readership on December 2, 2011. The article was not revised, but author disclosure remains the same (I don’t own any of the stocks mentioned).
We’re right at mid-month today, which would ordinarily be the time when I’m finishing up the “Idea of the Month” article for the Irregulars (that’s you) and sending it out. But this month, we’re pushing back the schedule a bit — because I’m heading out to the Value Investing Congress early next week and I’d like to share my favorite idea from that conference with you as my “idea of the month” for October.
So look for that next Friday, and I’m also hoping to post some special notes on Monday and Tuesday while I’m at the conference — you’ll probably see the Wall Street Journal headlines from whatever Bill Ackman and David Einhorn say in their presentations (as with Einhorn’s takedown of St. Joe last year, the speakers at this event often move stocks significantly), but I hope to provide some of the quieter details if a few other interesting ideas are presented (and they almost always are). Stay tuned.
Today, then, we’ll look at a teaser for the meat of our Friday File — this time, it’s one that many of you have been asking about, from the Money Map folks about a “glitch” in the price of oil. This comes in as a “special report” teaser that they’re using to try to get subscribers to Money Map Report, so it’s not for Kent Moors’ Energy Advantage newsletter (which Money Map also publishes), though it sounds like an idea that may have come from him. Here’s how the ad gets our motors running:
“There’s a multi-billion-dollar deal going down in the U.S. oil markets.
“It involves a glitch in the price of oil… a glitch so big, you could drive a semi rig through it.
“Secretary of State Hillary Clinton recently said ‘We are leaving no stone unturned,’ when it comes to ‘fixing’ this glitch. Yet, as you’ll see, fixing this glitch is a pipe dream.
“And for once, we’re looking at a big oil situation that doesn’t benefit ExxonMobil, BP or ConocoPhillips.
“They can’t do a thing about this glitch either, as much as they’d like to.”
Huh? What does the Secretary of State have to do with an “oil glitch?” We’ll get into that — but then they get into the hinting about the stock that will benefit from whatever this glitch might be:
“Thanks to this market anomaly, one small, independent refinery in New Mexico stands to rake in enormous profits, estimated at $6.7 billion over the next 24 to 36 months alone. That’s a lot of money for a small company with a market cap just over 1.5 billion dollars.
“Yet the small New Mexico refinery is not the only one sitting in the catbird seat…
“For investors, this is the chance – finally – the chance for the little guy to come out on the long side of a big oil deal.”
If there’s a company that’s going to make $6.7 billion in profits over three years but trades at just a $1.5 billion market cap, I WANT IN. If that were annualized and we’re assuming the earnings are split evenly among those years, that’s a forward PE ratio of 0.67. You don’t see PE ratios with a decimal in front of them, not even for fraudulent Chinese shell companies who make up their earnings (you need your invented earnings to sound feasible, after all).
Don’t get too excited, though — that’s a ridiculous number, so there must be some kind of catch. We’ll get into it in a minute.
So what’s the story with this refinery, and why on earth would a capital-intensive, highly-regulated, historically tough business like refining be so profitable?
“Thanks to this unusual price glitch, this tiny refinery can buy oil at perhaps the lowest price in the world.
“And according to our research, this refinery stands to rake in billions in profits… regardless of whether oil prices rise or fall… regardless of mild or severe winters… regardless of politics, OPEC, and just about anything else.
“JPMorgan Chase recently said ‘it will take a couple of years before we finally get [this glitch] cleared.’ International investment consultancy Société Générale added that ‘this trend is likely to continue.'”
The big issue? The spread between WTI crude and Brent crude — that is, the price spread between the historical benchmark US oil price, West Texas Intermediate, set for delivery at the pipeline crossroads of Cushing, Oklahoma; and the more global, European-set price of Brent crude, historically based on production from the North Sea but now the most frequently used standard benchmark for seaborne oil that’s traded internationally.
And while those two standard benchmarks (there are a couple others, too) have typically traded at pretty close prices to each other — which makes sense, given their similar makeup and the global nature of the oil markets — they have diverged and created a “market anomaly” this year.
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As the ad puts it…
“Brent crude is going for up to 25% MORE than WTI.
“That’s a wildly different price for virtually identical raw materials.
“How is it possible that the price for the same commodity could get so out of whack?
“‘Trapped Assets’ Provide Huge Opportunity
“Quite simply, there’s a GIGANTIC crude glut in certain areas of the interior United States.
“It’s a flood so huge, that if a barrel of Brent costs $100 on the shores of Galveston, you’ll pay only about $75 for a barrel of WTI in parts of land-locked New Mexico.
“Economists call this unusual condition ‘Trapped Assets’…
“But you can just call it “a life-changing opportunity.”
“You see, it doesn’t matter whether a refinery paid a full $100 for Brent, or just $75 for WTI…
“It still charges the same price for the gasoline, diesel, and heating oil it produces from that crude!”
Or, in a little quote from the Wall Street Journal that makes this “glitch” a bit clearer:
“WTI’s discount has been a boon to the refiners that can get the crude, because the price of gasoline and other fuels that refiners sell has kept pace with more expensive Brent crude.”