Fracking & Cracking: What’s Cooking in Oil and Gas
We’re a solid year into the trade war with China. But America’s energy industry just keeps going like gangbusters.
Why? Because global oil demand just keeps growing.
The world currently uses 98.6 million barrels per day of oil. And according to the International Energy Agency, global demand should rise to an even 100 million bpd by year’s end.
That’s why oil refiners keep bringing home the bacon. Because of the “crack spread.”
Not to be confused with “fracking” — the means by which today’s drillers get more oil out of the ground.
“Cracking” is just another word for the refining process: breaking apart crude oil into its components like propane, gasoline, jet fuel, diesel and heavier distillates like grease and asphalt.
When prices for the products are higher than the equivalent of crude, the “crack spread” is high.
And as you can see from this chart showing the crack spread of gasoline, that’s been the case since 2015.
As inventories drop, the gas crack is nearing five-year seasonal highs.
That’s why investing in oil refiners is a smart move now.
One way to get exposure is via the VanEck Vectors Oil Refiners ETF, aptly named CRAK.
American companies that can feed this growing market could reap a gusher of profits. One of them is pipeline and infrastructure company Phillips 66 Partners LP (NYSE: PSXP).
This $6.1 billion company was formed by its parent, refining and midstream giant Phillips 66 (NYSE: PSX), as a way to operate its midstream assets: Crude oil pipelines, gathering systems, refined product pipelines, terminals, storage systems and refineries.
Phillips 66 Partners has a full basket of projects on deck which should drive revenue growth, earnings and the growth of its dividend, too.
With a solid track record of growing dividends by nine times since its inception in 2012 — including the latest 12.5% increase announced for the first quarter of this year — Phillips 66 (the parent company) currently pays an annualized dividend of $3.60 per share and yields just under 4%.
And because the parent company loves to see the LP grow its dividend, it could drop other assets down to the partnership. More dropdowns could boost both Phillips 66 Partners’ distribution and its share price.
Despite all this, Phillips 66 Partners is a bargain compared to the competition. I think it’s because the market doesn’t understand the fundamental good news on this company.
For more about PSXP and the other stocks of my hotlist right now …
Grab a trial subscription in Wealth Supercycle for only $9 by clicking here.
All the best,
Sean
