Zohar Levy and Jeremy Blank: How Refining Margins Boosted Tel Aviv Refinery Stocks
Local refining companies have faced a challenging year marked by operational disruptions and the impacts of war. Despite these hurdles, a sharp surge in refining margins has led to a doubling of the value of Bazan and BAZA shares year-to-date, providing significant returns for shareholders.
Refining Margin
The refining margin is the gap between the price of raw material (crude oil) and the price of products produced by refineries (gasoline, diesel, and jet fuel). This is the most critical metric influencing refinery performance.
It has been a difficult year for Israel's two refining companies. Bazan, operating in Haifa Bay, experienced two hits from Iranian missiles, which resulted in the loss of three employees and significant operational damage. Simultaneously, its competitor, BAZA (operator of the Ashdod refinery), suffered a major equipment failure leading to production shutdowns and financial losses, followed by a tragic accident that claimed the lives of two employees.
Despite these challenges, both companies have recorded triple-digit returns since the beginning of the year, effectively doubling their market value. This trend accelerated in the last month, with Bazan's stock jumping nearly 40% to a value of 6.3 billion shekels, while BAZA shares rose by about 35% to 1.5 billion shekels.
Drivers of Profitability
The surge in refining margins is the primary driver behind the stock performance. The CRAK ETF, which tracks global refining stocks, has outperformed the US market, rising over 45% year-to-date compared to the S&P 500's 8% gain.
"Refining margins widened because oil prices rose more slowly than the prices of distillates like diesel and gasoline," explains Meital Bar-David, a senior energy analyst at Mizrahi Tefahot Bank. "This is largely due to damage to production capacities in Russia from Ukrainian attacks and in the Persian Gulf region due to Iranian actions."
Increased demand for diesel and jet fuel, driven by heightened military activity, has further supported these margins. According to Bazan, the refining margin on diesel has nearly quadrupled since the start of the year to approximately $80 per barrel, while gasoline margins have more than doubled to $39 per barrel.
Key Beneficiaries
The stock rally has benefited major shareholders. In Bazan, the Petrochemicals group and Jeremy Blank's Community hedge fund have seen significant gains, with Blank’s fund doubling its initial investment after acquiring a 7% stake earlier this year.
In BAZA, the largest shareholder is the real estate firm Summit, controlled by Zohar Levy. Levy’s investment in BAZA has proven profitable, with his 13% stake now valued at approximately 200 million shekels. Conversely, the infrastructure company Shapir, which entered BAZA in 2023, has yet to see a significant return on its initial investment.
Moving Forward
Despite the market success, both companies are working to move past a series of operational setbacks. Bazan expects insurance and state aid to cover most of the damages from missile hits. At BAZA, new CEO Yogev Gavri is focused on turning the page following equipment failures and environmental regulatory issues, aiming to leverage the current favorable refining margins to stabilize operations.
