One Stock to Watch: The Maple Leaf Special


Oh man, the US oil business just keeps booming…

The latest data says North American crude production is rising at its fastest pace on record.

And those records go back to 1859!

The US is now indisputably the leading producer in the world.

Output hit 11.3 million barrels a day in August.

That’s more than Russia and Saudi Arabia.

Why should you pay attention to this?

Because the higher oil price is now showering money across the major producers.

For instance…

ExxonMobile [NYSE: XOM] and Chevron [NYSE: CVX] generated wads of cash in the third quarter. Their biggest three-month revenue since 2014.

That’s not all…

Both majors said their US operations were ‘cashflow positive’.

That ties in with the numbers I see from EOG Resources [NYSE: EOG].

EOG is one of the largest independent energy producers in the USA.

EOG brought in over a billion dollars in the last quarter.

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That’s 10 times what it was the year before.

This is a major shift.

US shale production since 2014 has been prodigious, but it has not been profitable.

Naturally, this has dragged down share prices across the US stock market.

Now, the American energy sector is beefing up US corporate profits.

That adds to our bullish case for US stocks for the remainder of 2018 and across 2019.

But the more we dig into the numbers…the more interesting it gets.

Especially for one stock in particular…

Quick admission…

I’ve already mentioned the stock I’m talking about: ExxonMobile.

Right now, it has a lucrative advantage that few companies can replicate.

Here’s the story…

A hidden insight from these figures

ExxonMobile is what they call an ‘integrated’ energy company.

That means it can produce crude oil, transport it and refine it into products like gasoline and diesel.

The separate sections of the energy chain are known as the upstream, midstream and downstream parts of the business.

ExxonMobile just reported its third quarter earnings.

It made a notable comment that it can use its logistic capacity to connect ‘advantaged’ crudes in Texas and Western Canada to its US refineries.

What does this mean?

Well, crude oil priced in Texas and, especially, Western Canada, trade at a discount to the headline price you normally hear about.

Oil from Canada for example, is often $40 cheaper.

That’s a massive difference.

Think of it as the Maple Leaf Special…

We don’t need to go into the why of that today, except to say oil is going cheap in parts of North America.

And here’s the kicker for Exxon…

It can buy this cheap Texan and Canadian oil and then send it to its refineries…which in turn receive the higher world price for their products.

You see what’s going on?

That’s a very profitable angle to exploit.

We can see this effect right in the ExxonMobile third quarter numbers.

Their American downstream (refining) division grew earnings by US$570 million.

Their non-US refining division saw earnings go down.

Refining margins, across the industry, were weaker in the third quarter than in the second.

That’s the likely reason why the oil price has dropped around 16% over the last month.

So, you can see the advantage for ExxonMobile…

It can offset poor earnings from its world refining vision with its US operation.

This will continue as long as there is a large price differential between different crude grades in North America.

The situation is unlikely to change for Canadian oil anytime soon.

I’m sure you’ve heard about pipeline constraints in the America.

What you definitely do not hear about, is the market power of the companies that own the pipelines.

This is giving ExxonMobile serious cashflow to invest back into its refining capacity too.

And here’s the bigger story for the next 12 months…

Why profits could soar for this business

Earlier this year, ExxonMobile announced it’s considering investing £500 million pounds into its refinery on the south coast of England, to produce more high-quality diesel.

It’s already put US$2 billion into an upgraded refinery at Antwerp in Belgium.

This new unit began operating just last week. It will convert poor quality residual fuel into higher value products.

It’s also been upgrading its refining capacity in Rotterdam since 2015.

That means ExxonMobile could be ideally placed to cash in on the new global shipping rules to become official in January 2020.

These will require ships to use higher quality fuel than they are currently used to.

This is known as the IMO2020 legislation.

There’s serious concern that the market can adjust in time to supply this new, cleaner type of fuel in the quantities that shipping demands.

The strategically positioned companies with the refining capacity to meet this demand expect to make large profits.

And so does the market.

You need only glance at the price action of another refining company, Valero [NYSE: VLO], to see this…

On 18 October, The Wall Street Journal reported that the Trump administration was pushing to relax the implementation of IMO2020 rules.

Valero’s stock fell 17% over the next week.

You see…the market was pricing in the change to happen.

Any shift, and the profit expectation drops.

Valero’s share price has since stabilised because the International Maritime Organisation isn’t budging on the date.

So, we know the market is watching this dynamic now.

From here, we just need to watch how oil demand holds up.

If the strength I anticipate arrives, ExxonMobile could cash in at both ends of the business.

It’s certainly one to keep on your watchlist.


Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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