A company reports the best quarter in its history. EPS lands 61% above consensus. It repays its revolver in full and cuts net debt by more than $800M in nine months. The stock falls.
That’s what happened to our December energy pick last week.
The position is still up 76% since the pick, but Mr. Market has taken back a good part of what he gave us in the summer. Oil lost 17% in a week as Washington and Tehran edged toward a deal, two sell-side downgrades landed in October, and refiners as a group sold off twice in two weeks, once on Russian diesel and once on the midterms.
In my October update I kept the BUY in part because the position gave us energy exposure while the Iran war continued.
The war premium is now leaving the oil market, so that reason is weaker. The reason that replaced it is better: I rebuilt the model on the new balance sheet, and the price now discounts a refining trough deeper than anything in management’s own midcycle range.
This update grades the thesis, walks through the oil and refining outlook as the war unwinds, and shows what today’s price assumes about refining margins. Mr. Market sold the best quarter in this company’s history; the paid section names the company, shows the assumption he’s making to justify the price, and walks through the rebuilt model behind the new target.