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Published: July 8, 2010
Thomas O’Malley, a 68-year-old investor,
has made billions for himself and his backers as an investor in
oil refineries - those twinkling jungle gyms of pipes and tanks
and columns that turn crude oil into useful products like
gasoline.
This is O’Malley’s playground. He has probably bought and sold
more refineries than any man alive. He knows them like an old
chef knows the inside of his kitchen.
O’Malley got rich by following a reliable formula. He bought
refineries when they were cheap - castoffs, unloved by Big Oil -
trading for less than the cost to build them. Later, he sold
them for billions.
For example, in the aftermath of the 1987 crash, he picked up a
26% stake in Tosco, then a tiny refinery. O’Malley eventually
turned Tosco into the largest independent refiner in America. He
sold it to Phillips Petroleum - now ConocoPhillips (NYSE: COP)
-
for $7 billion.
Two weeks after he closed that deal in 2002, he took over
Premcor, becoming its top executive. He did it all over again,
using Premcor as a vehicle to buy refineries on the cheap. Four
years later, he sold Premcor to Valero (NYSE: VLO) for $6.9
billion.
His is the Midas touch in the refinery space. And he’s mostly
laid low since 2007. But now he is back again, buying a Delaware
refinery he once owned and sold to Valero. The deal is worth
$220 million and is the first purchase of a new $2 billion fund
created to buy U.S. refineries. O’Malley says he’ll look at any
U.S. refinery on the market.
In other words, it looks like O’Malley is going for the hat
trick -- trying to get rich three times in the same game.
It’s a contrarian bet, as most people think ill of the refining
industry. It’s plagued by costly regulations, weak profit
margins and lower demand for motor fuel. But you don’t get to
buy stuff below replacement value when times are rosy. As David
Foley, an investor with O’Malley put it, "Last time we did it,
we made six times our money."
Based on his track record, I would not ignore O’Malley’s play
here. Clearly, he thinks the industry has hit bottom. And there
are good reasons to think so, as we’ll see.
One reason comes from Barry Bannister, an analyst at Stifel
Nicolaus. He shows how peaking oil prices on a year-over-year
basis are usually a catalyst for better refining margins. (See
chart below. "WTI" is "West Texas intermediate," a common
benchmark for crude oil.)
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Higher refining margins means more profits for refiners. Higher
profits usually mean higher stock prices follow. Valero, the
bellwether refinery stock, is down about 75% from its all-time
high in 2008, which reflects the collapse of refining margins.
So an uptick in refining margins will likely work wonders for
Valero’s stock price, like rains greening a desert.
Expect other refiners to gain in kind...
Naturally, there are a slew of small-cap refining plays that you
can get into right now. Among them are Tesoro Corp. (NYSE: TSO),
Holly Corp. (NYSE: HOC), and Frontier Oil (NYSE: FTO)
-- all of
which own independent refining operations. Buyer beware, though,
the current oil climate has left these refiners burning cash
lately. This is a speculative investment...
-- Chris Mayer
Contributor
Penny Sleuth
Note: This article originally appeared on
Penny Sleuth |
