Premcor Is Pure Heat

By Gene G. Marcial

Burning White-Hot
Premcor (PCO ) is a clean-energy bet. And it has paid off handsomely. As a pure play on refining, it is profiting from tight capacity. Premcor is positioned to benefit from a "long period of strong margins," says Jennifer Rowland of J.P. Morgan Securities (JPM ), who rates it "overweight." Premcor's four refineries -- in Delaware, Ohio, Tennessee, and Texas -- have total capacity of 790,000 barrels a day. The gap between the cost of crude and the price fetched by gasoline and heating oil has widened. Douglas Terreson of Morgan Stanley (MWD ), which has done banking for Premcor, sees the spreads in 2004-05 at their best in a decade. He figures margins will rise to an average of $5.05 a barrel this year and $5.30 in 2005, up from $4.79 in 2003. Demand, he says, will outstrip refining capacity gains in 2004-06. Terreson also rates Premcor "overweight."

Although the stock has shot up -- from 21 last August to 34.95 on Apr. 27 -- it's still cheap, says Donald Gimbel of investment bank Carret, which owns shares. Based on his higher-than-consensus earnings estimates of $3.50 a share for 2004 and $4 for 2005, he sees Premcor at 45 in a year.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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