According to a May 26th report from Oppenheimer Equity Research, refiners are in an ideal position given low natural gas prices, industry fundamentals and a wide crude differential. Oppenheimer analysts Fadel Gheit and Luis Amadeo, who have been mostly bearish on the sector, say that’s why they’re raising their ratings pretty much across the board for U.S. refining stocks.
Details on Oppenheimer upgrade of refining stocks
In the introduction to their report Gheit and Amadeo note: “We are raising our rating on HollyFrontier, Marathon Petroleum, Phillips 66, and Tesoro to Outperform and reiterating our Outperform rating on Valero Energy (raising PT to $70 from $65), as we believe favorable industry fundamentals and company actions will continue to support higher valuation. We believe the stock performance will continue to reflect wide crude differential, low natural gas prices, growing refined product exports, improved petroleum demand outlook, and continued MLP growth.”
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They also point out that even given the strong stock performance of refiners over the last few years, “valuations remain attractive, and financial flexibility has improved with declining stay-in-business spending and rising growth investments in crude flexibility, product exports, and MLP growth.” Over time, this will permit refiners to shrink debt, boost dividends and repurchase shares.
Gheit and Amadeo specifically mention wide crude differentials, low-price natural gas and increasing exports as three positives for refining stocks:
Wide Crude Differentials
Inexpensive Natural Gas
The Oppenheimer analysts note that the U.S. went from the largest importer of gasoline and other refined products only three years ago to the world’s largest exporter of refined products today. This total reversal came about as a result of wide crude differentials, very low natural gas costs and higher run rates, which has further increased the cost advantage of U.S. refiners. They argue that this means large refined product producers Valero Energy, Phillips 66 and Marathon Petroleum can all compete favorably with local refiners in both Latin America and Europe.