FTO--cash rich refiner

**alex_li_98** Fri Nov 18, 2005 4:22 pm

FTO--cash rich refiner
http://value-investing-forum.com/viewtopic.php?t=588

**xxyygorich** Sun Nov 20, 2005 1:24 pm

Can EBITA be larger than operating income?

Although I am not sure, I think the true earning should be less than total income, shouldn't it?

Q3 should not be treated as a normal quarter. The price of gas and crude went crazy due to Katrina and Rita.

BTW, how does refinery business work?

Their cost is from raw material(crude) and other operating costs.
Their earning depends on the price of their final products.

We all know the price crude will increase in a long run. Does the refinery business have the power increase the final price of their final products and at least at a little bit faster pace than the crude? It seems to be true at least for gas price. Crude went from $5x -> $6x but the gas price went from $2.1x - $2.8x. However, I will like the coal and oil/gas industry sector better, because, we foresee their FINAL product price will increase however the cost of production (dig the coal out and drill the oil out) is kind of fixed and doesn't depend on the market.). That will give more solid profit power for those kind of business.

I remembered I read somewhere about that FTO has the power to process high sulfur/low price crude, which will be a plus.

Do u guys have a feeling about its P/B ratio? About 4. I think it's a little bit high, isn't it?

Sorry, I really don't have a solid answer for this pick.

**alex_li_98** Sun Nov 20, 2005 9:16 pm

1. operating cost includes depreciation/amortization, so EBITDA can be larger than op income if there is depreciation/amotization.

2. crude oil is only part of the cost of refiners. So it is normal that gas price does not go up same percentage as crude.

I am not familiar with the regulation part of the refinery business, so I am not sure about the pricing power. However I am sure that the refining capacity is the current bottleneck of the gas supply problem. So I am very comfortable about the sector.

-Alex

**alex_li_98** Mon Nov 21, 2005 11:40 pm

http://www.thestreet.com/_yahoo/comment/nailsnumbers/10253771.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

**xxyygorich** Tue Nov 22, 2005 12:09 am

Before internet bubble busted, some companies had good positive earning too (NT LU etc). My concern is the future profit ability of FTO. If gas price is alway going faster than crude price, it's a sure thing to buy FTO. However we are not 100% sure about that. Is there an historical data avaliable on comparison b/w crude price and gas price?

alex_li_98 wrote: http://www.thestreet.com/_yahoo/comment/nailsnumbers/10253771.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

**blast_investor** Tue Nov 22, 2005 12:30 am

Well, supply and demand works in refining sector too.

Currently in US, demand is larger than supply of refining capacities, therefore, high gas price verses crude price spread.

Hurricane margin was one time effect. But excluding the hurricane price, the shortage and high spread still hold true.

In Europe, actually there is over-supply of refining capacity so that refining there was not as good.

The US government is pushing for building up refining capacity, but the companies seem to resist that due to fear of over-capacity. The US local governments (state, city) actually were against refinery capacity expansion due to environment fear. Situation in US is pretty screwed up.

Building refining capacity is not that difficult comparing to drilling, all it needs is government approval and money.

I am actually not so clear on this US refining sector longer term. Still I do not expect refining capacity in US to increase quickly. Even quickest refining factory construction requires several years of time frame. Therefore it is still quite bullish sector.

The only concern is the valuation. Hurricane margin was so huge that I would not want to use that quarter as average margin. The gas price dropped significantly from $3.0 per gallon during hurricane months ago.

**alex_li_98** Tue Nov 22, 2005 3:58 pm

I agree that the consistency of FTO's profitability is not very clear and Q3 is an exception. Still given the cash pile and current price (already up somewhat from a few days ago, partly because of Cramer said something on his show), the valuation is cheap.

I saw people on Yahoo msg board metion in their conf call they mention possibility of a special divident to distribute some of the cash to share holders. I haven't verified it myself.

Thanks to blast and xxyygorich for your comments. I like discussions, because it gives you diffirent perspective and stimulate your thinking. Very nice forum.