Brent/WTI Differential To Aid Oil & Gas Refining & Marketing Industry
Zacks Investment Research | Feb 13, 2019 02:22AM ET
The Zacks Oil and Gas - Refining & Marketing industry consists of companies that are involved in selling refined petroleum products (including heating oil, gasoline, residual oil, etc.) and a plethora of non-energy materials (like asphalt, road salt, clay, and gypsum). Some of the companies also operate refined products terminals, storage facilities and transportation services. The primary activity of these firms involve buying crude/other feedstocks and processing them into a wide variety of refined products.
Let’s take a look at the industry’s three major themes:
- The high WTI-Brent crude differentials should buoy margins for refining and marketing companies. With input (or crude) costs relatively low and the current discount in U.S. oil prices to the global benchmark Brent at around $10 per barrel, profit for refined products is expected to be strong. This is because refined products, which are exported worldwide, use WTI crude as inputs but arepriced off Brent.
- Surging output in the United States is expected to keep North American oil prices in check. Record volumes in the face of fairly stable consumption has made U.S. crude cheaper than its international counterpart. With production set to hit another all-time high this year, prices are unlikely to increase much. This should provide the refiners with the opportunity to buy lower cost American oil and sell products at higher international-linked prices.
- Per the EIA, supplies of gasoline continue to remain elevated. The current stock of the prime transportation fuel in the United States is about 5% above the five-year range. Coupled with a modest demand growth, crack spreads – a measure of refining profitability – have narrowed significantly. The weak crack spread is likely to put downward pressure on both revenues and earnings of the sector components.
Zacks Industry Rank Indicates Favorable Outlook
The Zacks Oil and Gas - Refining & Marketing is a 13-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #110, which places it in the top 43% of more than 250 Zacks industries.
The group’s Zacks Industry Rank , which is basically the average of the Zacks Rank of all the member stocks, indicates impressive near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have reposed faith in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for 2019 has gone up by 11.5%.
Get The News You Want
Before we present a few stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags Sector & S&P 500
The Zacks Oil and Gas - Refining & Marketing industry has lagged the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry has declined 5.8% over this period compared to the S&P 500’s gain of 1.9% and broader sector’s decrease of 5.6%.
One-Year Price Performance
Industry’s Current Valuation
Since oil and gas companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of noncash expenses.
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 12.93X, higher than the S&P 500’s 9.88X. It is also significantly above the sector’s trailing-12-month EV/EBITDA of 5.21X.
Over the past five years, the industry has traded as high as 16.33X, as low as 4.29X, with a median of 7.20X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
The traditional fuels refining operation — where crude is turned into products ranging from gasoline and diesel to jet fuel and asphalt — is heavily dependent on the WTI-Brent differential. Given the steep discount in U.S. oil prices to Brent, profitability is expected to be strong for petroleum exporters. This, in turn, will bolster cash flow generation at the companies with downstream exposure.
In particular, shortage in the Permian takeaway capacity in the face of exponential production growth has led to widening differential, forcing producers to sell their crude at a sharp discount. The downstream companies’ whose refining capacity are leveraged to lower Permian pricing are poised for significant bottom-line growth.
None of the stocks in the Zacks Oil and Gas - Refining & Marketing industry sports a Zacks Rank #1 (Strong Buy). However, we present two stocks that have a Zacks Rank #2 (Buy) and are well positioned to grow. There are also two stocks with a Zacks Rank #3 (Hold) that investors may currently hold on to.
You can see the complete list of today’s Zacks #1 Rank stocks here .
Murphy USA Inc. (MUSA): This El Dorado, AR-based company is a leading independent retailer of motor fuel and convenience merchandise in the United States. Murphy USA, which carries a Zacks Rank #2, beat the consensus mark by 3.5% In the preceding three-month period.
Price and Consensus: MUSA
Par Pacific Holdings, Inc. (PARR): It is a diversified energy company with a portfolio of refining, infrastructure, retail as well as exploration and production assets. Based in Houston, TX, the Zacks #2 Ranked Par Pacific Holdings has an expected earnings growth of 56.6% for 2019.
Price and Consensus: PARR
Delek US Holdings, Inc. (DK): Brentwood, TN-based Delek US Holdings is an independent refiner, transporter and marketer of petroleum products. The company carries a Zacks Rank #3 and has an expected earnings growth of 8% for 019.
Price and Consensus: DK
PBF Energy Inc. (PBF): Based in Parsippany, NJ, PBF Energy provides end products that comprise heating oil, transportation fuels and lubricants among others. The company, also having a Zacks Rank #3, has an expected earnings growth of 4.8% for 2019.
Price and Consensus: PBF
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