Postcards: California Has Worn Me Quite Thin (Let's Go Downstream)

We wrap up our analysis of the energy supply chain with the Downstream, all while quoting Jimmy Buffett. ͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­ Forwarded this email? [Subscribe here]() for more [Postcards: California Has Worn Me Quite Thin (Let's Go Downstream)]( We wrap up our analysis of the energy supply chain with the Downstream, all while quoting Jimmy Buffett. [Garrett {NAME}]( Feb 16   [READ IN APP](   Dear Fellow Expat: All right. The Producer Price Index (PPI) was hotter than expected. Inflation isn’t going away, no matter how much they lie about it. But oil prices are still ticking higher, and natural gas has hit levels we haven’t seen in a long time (to the downside). We have one last place to focus on in the energy sector. The downstream. We love selling credit spreads on upstream producers like Occidental Petroleum (OXY). And we like to invest in midstream companies like Plains Holdings (PAGP) and Enterprise Product Partners (EPD). But the downstream? Well… that’s a different animal. There are four ways to approach it depending on your risk tolerance. Let’s go… All About the Downstream The downstream sector of the energy industry encompasses the final phase of oil and gas production. Let’s focus on the oil side for the moment. This portion of the sector centers on the refining, processing, and marketing of petroleum products. After crude oil is extracted and transported from its source (the upstream activities), it arrives at refineries in the downstream phase. Here, it is transformed into usable products such as gasoline, diesel, jet fuel, heating oil, and petrochemicals. These are critical byproducts of global industrial and consumer applications. The downstream sector also includes the distribution and retail networks that ensure these refined products reach end-users. So, think gas stations and industrial consumers. This segment is crucial for meeting the global demand for energy and chemical products. It plays a pivotal role in driving economic activity and supporting everyday life. With its complex infrastructure and strategic importance, the downstream sector is a key value driver within the energy supply chain. Refineries You probably noticed something odd if you’re an investor in the downstream refinery space. These companies trade at extremely low Price-to-earnings ratios. And their Enterprise Value to Earnings Before Interest and Tax (EV-EBIT) are also very low. From a fundamental perspective, they look cheap. The Big Three - Marathon Petroleum (MPC), Valero Energy (VLO), and HF Sinclair (DINO) all have EV-EBIT under 5.5x. I wouldn’t invest in Icahn Enterprises (IEP) with your money until it’s back above $30. More on PBF Energy (PBF) in a moment… Quantification (analyzing balance sheets and metrics) is only half the battle. We have to qualify things to understand why these stocks look so cheap. The answer is largely regulatory. The United States hasn’t built a significant refinery since 1977. Environmentalists would sue the daylights out of any company trying to build one now. On the east coast, a ton of refineries have shut down largely due to environmental challenges and the Jones Act - an antiquated law that makes it damn near impossible to move products by ship on the Atlantic Ocean. California (which has worn me quite thin) is worse. Here’s a partial list of refineries that have shut down in California, in part due to the regulatory framework of the state. - Golden West Refining Company, Santa Fe Springs Refinery (Closed March 1992). - Equilon Martinez Refinery (Ceased operations in 2002). - Berry Petroleum, Long Beach (Closed in 2003). - Shell Oil Co, Bakersfield Refinery (Closed in 2004). - Valero, Wilmington Asphalt Refinery (Rebranded, operational status changed post-2001). The sane refining in the U.S. is largely dedicated to the Gulf Coast (Texas, Louisiana). And because of the lack of pipelines, we sell a ton of gasoline to Central and South America. How to Trade and Invest We are long PBF Energy (PBF) in our Capital Wave Model Portfolio. PBF is about one-ninth the size of Valero Energy (VLO) with an insanely cheap valuation. It’s just so cheap and management is so good that we expect them to just keep buying up the stock. The risk of PBF is that only 6% of shares are owned by retail investors, making “multiple expansion” difficult. That said it’s a hell of a stock to trade credit spreads on… and Carlos Slim just bought more than $60 million in the stock. Second, Valero is a great stock to buy when our Energy Sector momentum reading. Valero is smaller than Marathon (MPC), but the latter is surprisingly more tied to the performance of Walmart (WMT) than the price of oil. When oil prices rise, VLO does well, and when our reading is positive, it does very well. Once again, I think there is more value in trading credit spreads. But if you want to take a little more risk, the best way to trade it would be with a trade called a Poor Man’s Covered Call. I’ll explain that trade tomorrow. Third, if you’re like me and you like speculation and focusing on the future of low-carbon America (by fiat), take a look at FutureFuel (FF). It’s trading for 88 cents on the dollar, and its Price to Graham is sitting at 0.59. I would like to see a buyback in the future, but FF is paying a great dividend of 4%. The downside is probably $5. The upside over two years… about $10. It’s at $5.85 now. Finally, recall that the downstream world is what fuels the transportation of chemicals. We’ve been “long” Ardmore Shipping (ASC) since January 2. Shares are up 14.2% to start the year, and this stock is absurdly cheap. There’s a great F score, little debt, a Graham score at .53, an EV-EBIT under 5, and a Return on Invested Capital (ROIC) north of 24%. Ardmore engages in specialty chemical shipments and has a very young fleet in an industry that is facing a lot of ship retirements in the future. I have a $20 price target - but I also had a $20 price target on SkyWest (SKYW) last year, and the damn thing went into the $50s. That’s all for today. I’m going swimming with my daughter, who just got admitted to her new school. She’s excited, and we need to celebrate. Stay positive, Garrett {NAME} Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. Under company rules, editors and writers cannot recommend their positions. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.   [Like]( [Comment]( [Restack](   © 2024 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()