While the timing is somewhat uncertain, I believe the independent refining industry is set to drastically tumble over the coming number of years from currently stretched multiples. I have selected to display VLO as it seems to represent a more conservative short, but with a little more work there are likely a number of competitors that are far better candidates. As an example, TSO strikes me as a much riskier situation, although handicapping the more consolidated PADD V asset base and Bakken exposure is beyond my competency. Given the separation of TLLP, they will not be able to rely upon the more stable transportation, storage and logistics assets (see "low multiple") during the next refining downturn. Another absolutely great example in my opinion will be CVRR, once the IPO takes place (see S1 filed 9/28/12) - although it will perhaps be an expensive position to carry until the inevitable. There is a reason you do not historically find core refining operations organized via MLP structure...On that note, NTI may be the absolute best, but I have not spent the necessary time to investigate.

MRO spins off MPC. COP spins off PSX. TSO isolates refining assets to maximize TSO share price. VLO announces the intent to separate the much more stable retail segment (see "low multiple"). I am sure the list is much longer. The first two strike me as major integrateds acknowledging and taking advantage of a once in a decade(s) opportunity created via increased onshore oil production and the subsequent transportation/logistics issues creating a correctable disconnect between WTI/Midcontinent crudes and refined products priced off of Brent. The third (TSO) and fourth (VLO) have me thinking that some lower-level I-bankers found some gullible audiences to pitch the short-term multiple expansion story. They probably did not even know how to react when the companies agreed to proceed.

Valero is the world's largest independent refiner with 16 refineries and 3MM bpd of throughput capacity, with an average capacity of 187K bpd. The company intends to separate retail operations, which will most likely take the form of distribution to existing shareholders (with VLO not receiving capital). VLO is also among the largest corn ethanol producers, which is a terrible business presently (which makes sense because it is a terrible idea). 10 of the companies 16 refineries are located in either the US Gulf Coast ("USGC") or US Mid-Continent ("Mid-Con"). Of the remaining 6, 2 are located in the US North Atlantic, 2 on the US West Coast, 1 is located in Europe and then there is the Aruba refinery that was shutdown in March 2012. The sale of the Aruba refinery is currently being negotiated, and estimates are a price of $350MM. The company took a sizeable writedown related to the Aruba refinery in Q2 and I remain skeptical of the $350MM price given the prolonged negotiations.  The non-USGC and Mid-Con refineries are not great performers as they are unable to benefit from the noted price disconnect.

Note that the below table incorporates data from Cap IQ, so numbers may be slightly debatable/not directly align with SEC filings. As an example, Revenue presented has been reduced by excise taxes included in company filings. 6/30/12 data is TTM. I realize that, as an example, market cap on 6/30 compared with 6/30 data is suboptimal as the data would not be incorporated in the share price (sorry - strong-form EMH is a joke. It would be funny to have an "EMH Club", the VIC antithesis), but if an obese person is 350 lbs. or 400 lbs. they are still fat.

For VLO to currently trade at nearly 11x trailing EPS is stupid. Crack spreads and differentials will not materially widen from here Brent/LLS, Brent/WTI, Brent/Canadian Heavy, etc. and it would appear that margins already passed cycle highs - 2011 appears to have been peak margins if you compare YoY, Q to previous year Q, etc. Pipeline reversals such as Longhorn will be completed and begin delivering crude from locations such as Permian beginning in 2013. The independent refiners are sitting at 52-week highs and Q4 just began with Q4 and Q1 representing annually weak demand periods.

Margins may remain elevated in the medium term, but I would be willing to guess that as more crude begins to reach the USGC, avoiding the issues at Cushing, margins and spreads are going to begin a long period of compression. My apologies that this idea may not be immediately actionable or well described. It is rather my effort to begin a dialogue on what appears to be, in my opinion, one of the most obvious short set ups of all time.

The resulting share prices above are derived from the current TTM 6/30/12 NI. You will see earnings drop and a more natural refining multiple assigned - only the multiple is accounted for above. I would not ultimately rule out a 50% drop. Although the timing is difficult to predict, I am fairly comfortable with the notion that the upside from here is fairly limited.

- Compression of wide differentials and related crack spreads.

- Mass realization that refining remains refining and is extremely volatile, quite unpredictable, and acts like a bipolar psychiatric patient through a full cycle. Early this year at an industry conference I actually listened to an executive from a large independent refiner literally refer to refining as "pulling the handle on a slot machine".

- Longhorn reversal reaches completion, Keystone XL is built, etc. and historical crude relationship(s) returns.