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Cramer’s Refiner Plays

Friday, 22 Mar 2013 | 6:25 PM ET
Domestic Oil & Gas Gives New Life to Refiners: Cramer
Friday, 22 Mar 2013 | 6:25 PM ET
Could an investment in a refiner keep your portfolio from cooling off? Mad Money host Jim Cramer explains.

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"If you happen to be a refiner, you're probably doing very well right now," said Jim Cramer.

The Mad Money host believes that US based refineries are in the sweet spot, here and now.

That's largely because there has been an explosion in domestic oil production due to recent discoveries in places such as the Bakken and the Eagle Ford. That's helped moderate the price of US crude oil, also known as WTI, to about $93.

Brent, which is the benchmark, is about $15 higher. (The difference is known as the spread.)

Currently refiners are benefitting from that spread because they're able to buy US crude oil at the lower prices, refine it and then sell their products at levels based on the higher priced Brent.

"That might sound like you're being ripped off," said Cramer, "but the truth is it's just how business works. Once the oil is refined, these companies have the right to sell their product anywhere. It is, alas, a global market, and if you don't want to pay for gasoline that's priced off of Brent, there are plenty of people around the world who will."

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As if that weren't enough, the refiners have another thing going for them. The nature of the refining business is such that it's almost impossible for a new competitor to break into the industry.

"That's because in the United States there are simply enormous barriers to entry," Cramer said. "From an environmental perspective, it's incredibly difficult to get approval to construct a new refinery—just getting a permit from the government can take many years, especially since no one wants a refinery in their backyard."

According to Cramer's research there hasn't been a single new refinery built in the United States since 1976.

Paul Souders | The Image Bank | Getty Images

That's bad for you because it keeps prices at the pump relatively high but it's good for the energy industry because it limits capacity.

When taken in tandem, Cramer believes these two catalysts should generate big tailwinds.

So, what's the play?

"I believe the refiners in the middle of the continent are the best way to go long-term, because they have the best access to all of our newfound oil that's still mostly trapped in the center of the country," said Cramer.

"With that in mind, my favorite growth refiner is HollyFrontier. This Dallas based company has a terrific longer-term track record, with best in class returns on capital employed, and it's still benefitting from its merger with Frontier Corp back in 2011," he said.

And if you're looking for yield, Cramer likes CVR Refining.

"It's a newly public Midwestern refiner that's structured as a master limited partnership and should sport about a 10% yield, which is a terrific deal and I'm a buyer given that payout," Cramer said.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com

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