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10 mayo 2007

Get Sweet on These Sour-Crude Plays

In my most recent column, I discussed the crude barrel, the various grades and viscosities that are traded worldwide and, most significantly, the increasing influence of sour crude in the global oil market.

Interestingly, the rising importance of sour crude has been largely ignored. Because of this, we may be able to position ourselves in front of this trend and hopefully garner some profits from our foresight. So, as promised, here are a few ideas to share with you. If they get your motor running, write back with a few of your own.

Not only is the sour crude barrel gaining speed, the sweet crude barrel continues to get scarcer and consequently more expensive. To take advantage of this, we need to find companies that are ahead of the curve on this trend. In the U.S., one company alone stands out: Valero (VLO)

This company has consistently upgraded its facilities to be more flexible in accepting sour grades for its refineries. In the past three years, it has acquired sour crude crackers in Aruba and Louisiana. It acquired Premcor Industries in 2005, which was the leading sour crude refiner at the time.

Valero still has a value-player's low, single-digit multiple, and analysts measure it in a totally inappropriate, typical growth value way, which has far less meaning, considering the specific business model of refiners. Therefore, I view their applied valuations and targets for the stock as just plain wrong.

Right now, more than 60% of the crude that Valero uses is of the sour type. As the basis between sour and sweet widens, Valero's margins and profits will continue to improve and impress. I highlighted this stock in my March 12 column, and it has risen more than 20% since then. Even at the current level, though, this stock is still an attractive long-term play. However, you should consider building any position slowly.