Is Frontier Oil ever going to drop?

[inishowen]

I absolutely love this oil refiner and have been waiting patiently for an entry point. It's a top ten annual return this decade (600%+) and just this last quarter had there best ever, even with charges. Only 110m in the float, mgmt is buying back shares and increasing the dividend, low volatility (beta is only .15), the pros love it, low pe, in business since the '40's. But what I like best about it is that they can refine the lower grade crude into a usable commodity, profitably. I'm no genius but I do know that only 20% of recoverable oil deposits are financially viable. If Frontier can turn some junk crude into liquid gold, is there anything wrong with that?

[DesertCat]

Nothing in your description indicates to me that you understand this investment. If you really understand it well, you should be able to answer these questions.

1) Does it have high returns on capital?

2) If it does, why? If it doesn't, why? Essentially, what are it's competitive advantages that prevent is service from being commoditized?

4) How does it compare to other oil refiners? Is it a better or worse business than the leading competitors?

5) Why is it's PE so low, and why should it be any higher? What is the true value of it's business?

6) How do oil prices affect it's value and profitability? Is the reason it's performed well because of the spike in oil prices? Will it perform poorly if oil prices come down? Now that our budget deficit is declining, does this mean the Dollar will start appreciating? And if so, how will this affect the price of oil?

7) Does management treat shareholders as partners or irritants? Do they issue themselves excessive stock options and use stock buybacks to help obscure that fact?

[DcifrThs]

when you say "budget deficit" is declining and its affect on USD, did you mean BoP.

i think not, but just in case, the BoP isn't improving substantially. the govt budget deficit is declining but it is almost entirely because of cyclical increases in tax revenues vs. cutting of costs. a downturn will quickly reverse that trend.

further, maybe i'm missing something here, how does the reduction of a budget deficit lead to the appreciation of the dollar?

i'd guess that a lower deficit leads to a reduced desire to issue bonds to finance the deficit, which reduces the supply of those bonds & increases the rate assuming demand remains constant. that increased rate leads to the dollar's appreciation in the spot mkt.

is that what you meant?

Barron

[inishowen]

Great points D,

I guess I have some homework to do.

My admitted basic screening to find this stock:

Hot industry
solid company with strong track record
relatively small float, that will get smaller
strong institutional demand
Mgmt statement that next quarter will be better than the current (best ever) quarter.

The kicker for me is that Frontier can more profitably refine lower grade crude than their competitors. They've also purchased an ethanol business to further diversify.

Of course FTO's price will fluctuate with the price of oil. I just don't see how, with expanding demand worldwide, that a barrel of oil will fall to the low fifties over the next two quarters, which is my investment time frame.

[DesertCat]

Something like that. Our trading partners have helped fund our budget deficits, and this huge creation of new treasuries has helped drive down the value of the dollar. Obviously there are a lot of factors at work (relative tax rates, etc), but I think it can be argued that very large budget deficits (larger than our trading partners at least) tend to hurt the dollar's buying power.

Even if you don't agree with that, you can agree that the decline in the dollar has provided a substantial part of the increase in oil prices domestically. Chart oil prices in Euros vs. dollars over the last six years or so and you'll see what I mean.

So if you invest in an company whose fortunes are linked to the price of oil, you have you have to be wary of anything that might cause the dollar to appreciate, as it exposes you to the risk of lower oil prices.