It’s Downstream Energy’s Turn to Shine

Energy Investing

For investors, energy companies have been the bright spot in a very dark 2022 stock market. The Energy Select Sector SPDR ETF (XLE) is up 43% year-to-date, while the broad-coverage (including energy) SPDR S&P 500 ETF (SPY) has dropped by 18%.

Energy companies divide into three sectors: upstream, midstream, and downstream. So far this year, downstream companies have lagged the broader energy results. Simply put, upstream companies are the drillers, midstream is pipelines and storage, and downstream are the refiners.

So far this year, the downstream companies have lagged broader energy results… which could make them your next great investment opportunity. The VanEck Vectors Oil Refiners ETF (CRAK) is up 13%, for example…

Oil refinery and oil production line graph in candlestick on blurred background.

While the large energy companies such as Exxon Mobil (XOM) and Chevron (CVX) cover the whole energy sector, from drilling to gas pumps, most energy companies focus on one of the three subsectors.

The three segments of the energy industry
Source: https://energyhq.com/2017/04/upstream-midstream-downstream-whats-the-difference/

Refining is an interesting business. The prices of both the raw materials (crude oil) and the finished products (fuels) are set by market forces. The refining margin is referred to as the crack spread. Historically, the crack spread averages about $12 per barrel, but it can go to zero or negative and widen tremendously.

Currently, the crack spread is at or near record levels, which means $50 of profit per barrel of produced fuel. I don’t think the market is close to pricing in the profits the refiners will report for Q2. Here are three stocks to research and consider:

  • Phillips 66 (PSX)
  • Marathon Petroleum Corp (MPC)
  • Valero Energy Corp (VLO)

The three are very similar in market cap and operations. Buy one or buy all three.

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