Energy seems to be on everyone’s minds these days, after energy companies of various stripes were pretty much the only winners of 2022… so I thought we’d sniff out a quick teaser solution for you along those lines.

A reader sent in an ad from Keith Kohl’s Energy Investor ($49/yr) over the weekend that’s titled, “The American Diesel Crisis Is About to Begin” — and it’s a pretty typical “there’s a shortage coming, and you want to buy the companies that can fix the shortage” tease. Here’s a little excerpt from the scary lead-in:

“America is facing a dire shortage of diesel fuel…

“Nothing can be done to avoid it…

“And its impact won’t just be felt by truck drivers.

“The Telegraph calls diesel fuel the “underappreciated lifeblood” of our economy…

“The Energy Information Administration says diesel is the fuel that transports “nearly all products people consume”…

“And Tom Kloza, one of the founders of the Oil Price Information Service, said global commerce would “freeze” if we run out of diesel fuel entirely.

“But what many Americans don’t realize is that day is coming a lot closer than we’d ever imagined.

“In fact, according to the Energy Information Administration, the U.S. has only 34 DAYS until
its diesel supply runs out completely!”

That’s true, though it’s perhaps a bit out of context — distillate fuel oil, including diesel, is a consumable, and the general idea is that it’s made as it’s needed. There are inventories, but they are not massive — the inventories of diesel fuel were slipping through 2022, and are below average, but the current “distillate fuel oil days of supply” being at 34 days doesn’t mean that’s when we’re going to run out of diesel… it means the inventories are below the typical average at this time of year of 25-40 days of inventory. Here’s a good illustration of the recent history from the Energy Information Administration:

I’m assuming Keith Kohl’s numbers are a little old, and there is some seasonality to diesel oil (both because that “distillates” category includes heating oil, and because agricultural demand peaks in the fall and spring and inventories usually peak in the summer), but yes, diesel has been in shorter supply in 2022 than is typically, and that’s both because of some refinery outages and closures in recent years, and because of the cutoff of Russian imports that generally went into the diesel market.

Some of that is being made up for by increased refined diesel exports from the Middle East, China (where trucking slowed down a bit with their COVID restrictions), and even Western Europe, and some of it is being helped by unseasonably warm weather in some places and, perhaps, by economic slowdowns that depress demand a little.

I don’t mean to talk away the problem, just provide some context — yes, the distillate fuel/diesel inventories are below their average range, almost everywhere in the US. They were a little below average for most of last year, and they are worse this year. That got a fair amount of attention in the press, particularly with older or less profitable refineries closing in recent years, and it is real. It’s just that it doesn’t mean we’re going to run out in 30 days — there are well over 100 oil refineries in the United States, producing close to five million barrels of low-sulfur distillate a day. Maybe they’ll be a bit more profitable, with strong demand and higher prices for diesel or heating oil, but the urgency is probably overstated.

As with a lot of “dirty” industrial and energy stuff, most of us are conflicted… we want to use less oil and gas and coal, we’d like electric cars and trucks to be ubiquitous and practical, we want to transition to something cleaner, and we definitely don’t want refineries or new pipelines in our backyards… but we also want to fuel our cars and trucks for the next couple decades as we transition, and we want to heat our homes and get our Amazon deliveries and buy more electricity at reasonable prices. It’s a tough combination because of the very long time lags in industrial businesses like energy — regulatory and public pressure to reduce fossil fuel use means that nobody wants to invest billions of dollars to build a facility that politicians and neighbors hate and which might be in much less demand 10 or 20 years from now if vehicle electrification continues to be successful… even if that facility is probably really needed for those 10-20 years. It’s quite similar to the challenges Porter Stansberry highlights about natural gas (his “Two Men Destroying America” and “Boston Blackouts” pitch, which we covered here). I’m glad I’m not in charge of fixing that problem.

But, we’re looking for our diesel answer here — so back to the “overstating” from Keith Kohl’s ad:

“America is facing a historic shortage of the most important resource of our economy.

“We need diesel more than any other resource on the planet….

“Without it, our society would crumble in days.

“Hard times are coming ahead.

“If we run out of diesel, life as we know it will change nearly overnight.

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“You won’t find essentials like bottled water, canned food, and medicine anywhere…

“Because the trucks that deliver those goods will be stalled on the side of the road.

“Every gas station you try to fuel up at will be bone dry…

“Because the tankers that deliver the gas run on diesel too.

“And hospitals won’t be able to receive the medicines they need for treatment.

“We’d fall into anarchy within days.

“Right now, I’m going to show you how you can protect yourself from this emergency — and come out wealthier on the other side.”

So what’s our solution? It is, naturally, a company that refines diesel fuel… here are the hints about what Kohl is pitching:

“There’s only one American company that stands to fill the diesel shortage gap.

“And it could save America from utter collapse.

“It’s one of the largest energy producers with 13 refineries scattered across the United States.”

OK, that narrows it down to a couple candidates… which refinery company is this?

“Skyrocketing diesel prices are creating windfall profits for this company…

“Which is why it’s posted impressive earnings over the past 12 months.

“In fact, last quarter it posted earnings of $5.4 BILLION, which is 10 TIMES more than it had back in 2021.

“Yet the majority of investors have no idea it exists.

“I recently added it to our model portfolio, and we’re already up 10%.”

OK… so what’s our super diesel stock?

This is, sez the Thinkolator, Phillips 66 (PSX) … and yes, their net income did come in at $5.4 billion in the September quarter, up from $402 million a year ago. And that’s almost entirely because of higher refined product prices — revenue did grow nicely, by almost 50% that quarter, and their input costs grew much less… so their net income went from 1% of revenue a year ago, to 12%. You don’t see 1000% revenue growth for big companies very often, and it’s not the kind of thing that can repeat for very long, but sometimes commodity prices giveth windfalls. It goes the other way, too, in the dark days of 2020 their income dropped 97%.

And yes, they do operate about 13 refineries right now — it’s actually 12 in the US and two in Europe, but I suppose that’s close enough (Marathon Petroleum (MPC) is the other large refiner that could be in range of being a match here, with 13 refineries, though the other clues don’t fit them).

Phillips 66 is doing quite well right now, as you might imagine, and the shares are quite reasonably valued — like most big oil producing companies, they’re valued as if we’re pretty close to peak earnings, PSX is at less than 5X trailing earnings right now, and has a dividend yield of almost 4% (that dividend has grown almost every year for a decade, though they did keep it flat in 2020). It’s been a pretty popular stock as it combined “momentum” and “value,” though that’s true of much of the energy sector of late — investors.com/research/the-income-investor/top-dividend-stock-phillips-66-races-away-on-growth-increasing-dividend/">PSX even got featured in Investors Business Daily last week.

Compared to its closest pure-play competitors, Marathon Petroleum (MPC) and Valero (VLO), PSX looks pretty reasonable — it’s likely to grow earnings faster than Marathon and slower than Valero, it’s a little cheaper than both, and it carries a higher dividend yield than either right now. Maybe worth a look if you’re into that kind of thing — just note that refiners are historically very volatile, since they are extremely dependent on the spread between crude oil prices and refined product prices but can’t really control either. It’s working well right now, and PSX is a well-run company that has specialized in some high value-add products in petrochemicals in addition to normal stuff like diesel and gasoline… but their earnings won’t always go up in a straight line. You probably know that, that’s really what a PE of 4 is telling you, that the consensus of other investors is that things are as good as they’re gonna get right now. The hope, when buying such stocks, is that the consensus is too pessimistic, as is often the case when a sector goes through a big swing… and who knows, maybe it is.

All three of those companies look pretty reasonable at first glance, and I can see why PSX might stand out as a little better than its competitors… but I should also note that it has been the underperformer in this space in recent years — this chart shows the total return for Phillips 66 (purple), Valero (blue ) and Marathon Petroleum (green) over the past decade, compared to the S&P 500 (orange)…

PSX Total Return Level data by YCharts

… you can see they’ve all done well, and PSX has had less volatility… but it has also generated shareholder profits that are far lower than those two big competitors, particularly since the COVID shutdowns. Maybe that will turn and they’ll catch up, they don’t seem to be a less efficient operator in general… or maybe it’s indicative of some big qualitative difference between these three that I’m unaware of. I’ve run out of things I know that I can share with you now, but I thought I’d point out that final tidbit.

And this is where I lob the ball back to your side of the court… think refining profits will rise as the diesel market remains tighter than usual? See great profits ahead for Phillips 66 or for any of the other refiners out there, large or small? Let us know with a comment below.