Where Is Refining Headed in 2013?

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Joel South: The top sector that I really liked in 2012 was refineries. We've talked about them quite a bit. Going forward, this also is a sector that you will want to watch. A lot of the strategic advantages they have, I don't think will be there long term, but if you look at this past year, they obviously did extremely well.

Overall, Phillips 66, one of the strong companies in the area, up 56%. Some of the best performers as well -- Western Refining up 120%; CVI, which is CVR Energy and UAN, basically are up 150%. Definitely very strong.

Going forward, these companies did so well because they had cheap access to WTI crude. They're all Mid-con-based refiners. Is that going to stay around? That's the question. There's definitely a case to be made that they will keep the spread between the two prices.

The reason is, the shale plays are growing at phenomenal rates. If you look at a lot of the crude that these companies are getting, they're looking at Canadian Select, which is supposed to grow by 1.8 million barrels a day by 2020. The Bakken is going to grow another 475,000 barrels a day. Eagle Ford, over 700,000 barrels. The list goes on.

That begs the point: Will they have the price differential? I think they will.

The thing that you do have to look out for is the takeaway capacity. There's a lot of projects online, but you'll have to wait and see if they actually come about, because they need a lot of federal approval.

That's the debate that will go on, but in the short term, these companies are using their cash to build out a lot of projects to make them sustainable going forward. You can look at HollyFrontier; they have their Detroit Heavy Project, refitting a lot of their refineries to take a lot of the Canadian Select oil, a lot of the bitumen, so they'll have that access to cheaper oil going forward.

Also, Phillips 66, they're also moving into a different type of business altogether. They're getting into chemicals, but they're also looking at their midstream. There's definitely a lot to happen there.

The article Where Is Refining Headed in 2013? originally appeared on Fool.com.

Joel South and Taylor Muckerman have no position in any stocks mentioned. The Motley Fool owns shares of Western Refining. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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