My latest post is up at RealMoney.

I think there is still quite a bit of run left in the energy bull market. That belief has led me to some good picks, such as Patterson Uti (PTEN) and Flowserve (FLS) , as well as one bad one, Frontier Oil (FTO) . My models recently brought W&T Offshore (WTI) into focus, and I’m thinking it is more likely one of the former than the latter.

The stock shows up very well in the Stock Market Beat models:

• Earnings momentum score: 1 (Positive)
• Earnings quality score: 5% (Positive)
• Price momentum score: 37% (Positive)
• Free cash flow yield: 10.6% (Positive)
• Return potential: 16.8% (Positive)

Capital expenditures are ramping up, which will hurt free cash flow in the near time. If the expenditures are as successful as those of the past, however, the cash should start flowing again after a year or two.

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Disclosure: Author is long UNITED STS OIL FD LP UNITS (USO) at time of publication.

My latest column is up at RealMoney. Here is a summary:

Government economic reports can do more than just indicate the state of the economy. Since many of the reports include industry-level data, digging deeper in the reports can help investors find specific industries to consider more closely. For example, the Bureau of Labor Statistics, which prepares the PPI report, provides detailed information on an industry basis.

Since I wrote about the PPI data in September, the pricing power has shifted to some different industries. Therefore, I thought an update would be in order.

Some of the industries that look interesting are petroleum refineries, industrial gases, computers, computer storage devices, and line-haul railroads.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned.

photo credit: Gastev

This article is a reprint of my February 19, 2008 RealMoney column

After peaking above $49 per share last year, refiner Frontier Oil (FTO) sunk to intraday lows in the $20’s last month before starting a rally on the news of Valero’s (VLO) positive outlook on the latest conference call. My biggest surprise, looking over the data for Frontier and the industry, is why it hasn’t rallied even more.

First of all, Valero indicated that “Current industry conditions are setting the stage for rebounding gasoline margins.” If true, that would be equally positive for Frontier and others. Not that I don’t believe Valero, but I thought a check of the PPI industry statistics could provide an unbiased second opinion.

Petroleum Refineries PPI, 12-Months Percent Change

Source: Bureau of Labor Statistics

Lo and behold, year/year price increases for petroleum refineries have suddenly shot straight up. If that doesn’t set the stage for rebounding margins, what will?

Hardly a week later, there was actually speculation that Valero would buy Frontier. However, according to the Reuters article, Fadel Gheit, an oil analyst with Oppenheimer & Co, also questioned the rationale behind Valero buying Frontier, especially since Valero has already sold one refinery and has said it would sell two and maybe three others.

Sold a refinery, you say? That sounds like a ripe opportunity for a comparables analysis to see how Frontier’s valuation stacks up against an arms-length transaction between industry experts. And at first glance, Frontier doesn’t come out looking so hot.

Valero’s Lima, Ohio refinery was sold last year to Canada’s Husky Energy (HSE.TO) for $2.1 billion. Lima’s 165,000 barrel per day stated capacity being quite close to Frontier’s total capacity of 162,000 barrels per day, the comparison initially looks valid. And with Frontier’s enterprise value at $3.6 billion, the implications could be that Valero’s management got ripped off, Frontier is overvalued, or the assets aren’t really comparable.

Valero is a good company, and I don’t believe its experienced managers got ripped off. The other two theses can be tested by comparing the assets. According to Husky’s road show slides, it seems Lima was something of a fixer-upper. Running well below the stated throughput, its sales and profitability were not close to those of Frontier. Taking the 2006 performance as an example, I was able to compare the valuation relative to various fundamental metrics.

Sources: Company filings, compiled by William A. Trent

Although Frontier looks more expensive on the basis of throughput or sales, its full-throttle capacity utilization has resulted in a far more efficient operation. As a result, Frontier is cheaper based on EBIT or EBITDA, which are the valuation measures most frequently used in the industry.

Of course, running at full capacity also means there is little room for further improvement other than through the commodity prices themselves. Even considering a fair valuation, that could mean there is significantly more downside risk than potential upside.

I also looked at Frontier on the basis of my favored valuation tool, its free cash flow yield. In this regard, Frontier’s yield on trailing free cash flow is about 6.2%, which is sufficiently above the yield on five-year Treasuries that I don’t need significant growth to justify a purchase. The potential rebounding margins, in other words, is a bonus.

Disclosures: None

Disclosure: Author is long UNITED STS OIL FD LP UNITS (USO) at time of publication.

Producer prices rose 0.7 percent in April - Yahoo! News

Elevated energy costs pushed producer prices up a slightly more-than-expected 0.7 percent in April, but excluding volatile food and energy costs, prices paid at the factory gate were unchanged, a Labor Department report released on Friday showed.

As the headline (and core) numbers get widely reported, I like to dig a little deeper into the PPI report to find industries that appear to have more (or less) pricing power than normal. If the pricing power has not yet been recognized widely it can occasionally lead to some good stock picks. (All pricing power charts are from the Bureau of Labor Statistics.)
The pricing power in fruit and vegetable canning appears to be helping Del Monte gain some momentum.

Refinery margins hurt Large Cap Watch List (Track at Marketocracy) member Frontier’s (FTO) earnings. Is a turnaround in sight?

One place the pricing power theory definitely didn’t work is in industrial gas. The stocks never weakened, and now pricing power seems to be making a comeback.

Consolidation and pricing power? What’s not to like about Mid Cap Watch List (Track at Marketocracy) and Large Cap Watch List (Track at Marketocracy) member Steel Dynamics’ (STLD - Annual Report) prospects?

Pricing power for industrial valves helped me call the recent earnings pop for Curtiss Wright (CW - Annual Report).

Would you looky what’s happening to semiconductor pricing? Who would have expected that?

Well, that seems like enough for now. Back again next month.

Disclosure: William Trent has a long position in SMH.

Large Cap Watch List (Track at Marketocracy) member Frontier Oil Corporation (FTO) announced record first quarter net income of $74.7 million, or $0.68 per diluted share for the quarter ended March 31, 2007, compared to the prior record first quarter net income of $57.4 million or $0.51 per diluted share, for the quarter ended March 31, 2006. However, analysts had been expecting $0.75. According to the press release:

The first quarter 2007 results benefited from diesel crack spreads which averaged $21.66 per barrel compared to $15.51 per barrel in the first quarter of 2006. The gasoline crack spread also improved in the first quarter of 2007 to $12.92 per barrel compared to $9.22 per barrel for the first quarter of 2006. While Frontier continues to benefit from crude oil differentials, both the light/heavy crude oil spread and the WTI/WTS spread decreased from the first quarter of 2006 in part because WTI traded at a discount to other light crude oils. For the first quarter of 2007, the Cheyenne Refinery’s light/heavy differential averaged $13.24 per barrel and the light/heavy spread at the El Dorado Refinery averaged $12.46 per barrel. The WTI/WTS spread averaged $4.34 per barrel for the quarter ended March 31, 2007.

The results are complicated by the fact that the company is amortizing a tax gain over each quarter.

The first quarter 2007 results include an after-tax inventory gain of approximately $2.0 million or $0.02 per diluted share, compared to a loss of $13,000, or $0.00 per diluted share, for the same period of 2006. As
expected the Company has earned the remaining approximate $8 million tax credit from ultra-low sulfur diesel production in the first quarter of 2007. However, Frontier will recognize this benefit in its income tax provision ratably (approximately $2 million per quarter) in each fiscal quarter of this year.

If the company had recognized the full gain in the first quarter (as it was all received) the earnings under Generally Accepted Accounting Principles (GAAP) would have been $0.74 - much closer to analyst estimates. However, if analysts were not including any part of the gain in their estimates then the proper earnings comparison is $0.66 - and thus a worse miss.

Disclosure: Author is long UNITED STS OIL FD LP UNITS (USO) at time of publication.

Superior Energy Services (SPN) issued the following statement in an 8K filing:

On April 11, 2007, the Board of Directors of Superior Energy Services, Inc., upon recommendation of its Nominating and Corporate Governance Committee, approved increases in the cash and equity compensation payable to non-management directors. The Nominating and Corporate Governance Committee received input from an independent compensation consultant in order to ensure that non-management director compensation reflected current competitive market conditions.Effective May 1, 2007, the amount of the annual retainer for non-management directors will be increased from $30,000 to $40,000 per year. In addition, the dollar amount of restricted stock units awarded to non-management directors following the 2007 annual meeting of stockholders will be increased to $140,000 from $100,000 awarded in 2006.

That sounded awfully generous to us, but looking through the recent proxies for other small- and mid- size oil and oil services companies on our watch lists it looks pretty much in line, if not at the low end.

If there are any such companies in need of a new director, we hereby offer our services.

Disclosure: Author is long UNITED STS OIL FD LP UNITS (USO) at time of publication.

With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Large Cap Watch List (Track at Marketocracy).

Though less than the Small Cap Watch List and Mid Cap Watch List (Track at Marketocracy), there was still relatively high turnover in this list. 14 of the original 33 names made the cut for the new list (which was trimmed to just 26 names.) Part of the reason for the turnover was to reduce overlap between the lists. One third of the Mid Cap Watch List (Track at Marketocracy) names appear on each of the Small Cap and Large Cap Watch List (Track at Marketocracy)s, but there is no longer any overlap between small and large.
So without further ado, the names on the chopping block from the previous list are:

3M (MMM); Continental (CTTAY.PK); Mitsui (MITSY); Anheuser-Busch (BUD); ConocoPhillips (COP); Helix Energy (HELX); IndyMac Bancorp (NDE - Annual Report); Barr Pharmaceutical (BRL - Annual Report); Quest Diagnostics (DGX); Public Storage (PSA); ITT Educational Services (ESI); Equifax (EFX); Rent-a-Center (RCII); Kroger (KR); Ricoh (RICOY); First Data Corp. (FDC); Expeditors International (EXPD); and Keyspan (KSE).

The new list is:

Large Cap Watch List (Track at Marketocracy) member Frontier Oil reported Fourth Quarter Earnings: Financial News - Yahoo! Finance:

Frontier Oil Corporation (FTO) today announced quarterly net income of $52.4 million, or $0.47 per diluted share for the quarter ended December 31, 2006, compared to net income of $63.0 million or $0.55 per diluted share, for the quarter ended December 31, 2005.

The results were well shy of consensus estimates for $0.55. Cost overruns for refinery improvements were the main culprit.

We asked, but no one answered. So we are taking our own counsel and breaking our Watch List into three portfolios: Small Cap, Mid Cap and Large Cap. Each will be tracked against the relevant S&P index going forward from their collective inception date of January 31 (priced at the close of market trading that day.)

For your viewing pleasure, the Large Cap Watch List (Track at Marketocracy) (to be measured against the S&P 500) follows.

Astute observers will notice less overlap between this watch list and the names in the Small Cap Watch List and Mid Cap Watch List. This was not for lack of overlap, as the smallest S&P 500 name has a market capitalization of $600 million, which would allow for complete overlap with the Mid Caps if we chose. Instead we selected an arbitrary low of $2 billion for large-cap names, which cuts off five names that are actually in the S&P 500.
In addition, we will provide a “quick and dirty” analysis of each name, with a goal of one such analysis per day. As the name implies, the quick and dirty analysis will be incomplete. We are hoping you will join in the debate and fill the gaps in our analysis.