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Torrance Refinery to Restart: California Stocks in Focus

On Saturday, California’s South Coast Air Quality Management District (SCAQMD) approved the restart of the fluid catalytic cracker (FCC) at ExxonMobil Corporation’s XOM refinery in Torrance, CA. However, the news came with a pinch of salt for the energy major as it would have to shell out $5 million in penalties owing to the air pollution that would result from the plant.

The refinery had been crippled by an explosion in Feb 2015, which wounded four contractors, caused heavy damage at the plant and shocked nearby residents. The Torrance Refinery of Exxon Mobil covers 750 acres, and has approximately 650 employees and 550 contractors. It processed an average of 155,000 barrels of crude oil per day and produced 1.8 billion gallons of gasoline per year. The facility, known for special low-emissions gas, produces about 10% of all gasoline sold in California.

Torrance Happened at the Right Time

The timing of the Torrance restart could not have been better. This is due to the fact that historically April is defined by the U.S. Environmental Protection Agency (EPA) as part of the “transition season” for fuel production. During this time, Californian refineries focus on blended fuels which are dearer. Also, during this time, prices are usually on an upward trajectory owing to increased demand, maintenance costs and capacity decreases.

Let's take a look at the energy companies whose fortunes are closely tied to the gasoline prices in California:

San Antonio, TX-based Valero Energy Corp. VLO is the first name that comes to mind. The company is slated to benefit immensely from any uptick in gasoline prices. Our bullishness stems from the company’s 15 refineries stretching from California to Canada to the United Kingdom. With this network of refineries, Valero has a combined throughput capacity of approximately 3.0 million barrels per day. Valero Energy currently carries a Zacks Rank #3 (Hold).

Apart from Valero, the world’s largest publicly traded energy company ExxonMobil is another stock on which we will keep our eyes peeled. The energy giant’s Torrance refinery processed only about of 155,000 barrels of crude oil per day. However, this was only a portion of the giant’s total domestic refining presence which is in excess of 1.9 million barrels of crude oil per day. ExxonMobil currently carries a Zacks Rank #3.

Next comes, Europe’s largest oil company Royal Dutch Shell plc RDS.A which is all set to sail smoothly in 2016 with its sustainable dividend and successful BG integration. The energy behemoth with its sheer size is expected to tide over the ongoing industry-wide doldrums. On the other hand, a persistently low oil price will likely hamper the near-term performance of the stock. The company currently carries a Zacks Rank #5 (Strong Sell). Earlier, the closure of the Torrance refinery had favored the company’s refinery in Martinez which refines and markets gasoline and other petroleum products under the brand name of Shell throughout the West and northern Midwest.

Another prominent name is San Ramon, CA-based Chevron Corp. CVX which operates two of the state's largest refineries, in Richmond and El Segundo. Together, these process more than 500,000 barrels of crude oil a day. The company – through its wholly owned and affiliated refineries – has a capacity to process over 1.8 million barrels per day (MMBbl/d) of crude oil. Chevron currently carries a Zacks Rank #3.

End Note

The price of gasoline is now being seen by many investors as something that could disrupt positions held in the current volatile stock market. The Torrance refinery accounted for about 10% of the total gasoline capacity of California. Also, the refinery provided about a fifth of southern California refined gasoline capacity. Thus, the restart of the refinery resulted in a sharp fall in the California gasoline price known as California Reformulated Gasoline Blendstock for Oxygenate Blending (CARBOB) against the futures.

However, we expect Californian gasoline’s own set of environmental laws and higher refining capacity to pull up the prices this April. Thus, we advise investors to be careful while pouring their money into the above-mentioned domestic refining stocks in such a mixed scenario.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
VALERO ENERGY (VLO): Free Stock Analysis Report
CHEVRON CORP (CVX): Free Stock Analysis Report
ROYAL DTCH SH-A (RDS.A): Free Stock Analysis Report
EXXON MOBIL CRP (XOM): Free Stock Analysis Report
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