The crack spread is the difference between the price of crude oil and its petroleum products; basically it is what an oil refiner's profit margin will be after breaking apart the oil. The most widely used crack spread is the 3:2:1 (3 barrels of oil, 2 barrels of gasoline, 1 barrel of heating oil).
Within the past two months, we have seen the Brent/WTI spread go from $20.00 to currently $7.88, as well as the crack spread go from $44.00 to $24.78.
Looking longer term at the Brent/WTI spread, it has kept between 0-$10 while the crack spread remains elevated, but looks to break lower.
Below is the DCF model I have worked out:
Even though I have a price 25% above today's current market price, I believe that the days of the wide Brent/WTI and Crack spread are just about over, and their profit margins going forward will substantially be hurt. The refiners have run up over 100% in a one year period due to these spreads widening, but I believe their current market price has not put in the fact that the spreads have fallen this far this fast. HFC is down 17% since the beginning of March, it's all time high; at the same time, the Brent/WTI spread was also at its widest point ever. I would advise not to get stuck in this trap, and not buy the stock, or if you own, take profits.