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Why Investors Should Focus on These 3 Refining & Marketing Stocks
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While the Zacks Oil and Gas - Refining & Marketing industry is still far from normal, it appears that the space is on the mend. In particular, easing mobility restrictions and rising vaccination rates should help operators like HollyFrontier Corporation , Murphy USA (MUSA - Free Report) and World Fuel Services Corporation .
Industry Overview
The Zacks Oil and Gas - Refining & Marketing industry consists of companies that are involved in selling refined petroleum products (including heating oil, gasoline, jet fuel, 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 involves buying crude/other feedstocks, and processing them into a wide variety of refined products. Refining margins are extremely volatile and generally reflect the state of petroleum product inventories, demand for refined products, imports, regional differences, and capacity utilization in the refining industry. Other major determinants of refining profitability are the light/heavy and sweet/sour spreads.
3 Trends Defining the Oil and Gas - Refining & Marketing Industry's Future
Escalating RIN Cost a Major Setback: U.S. refiners are feeling the pinch of higher Renewable Fuel Standard (“RFS”) costs to comply with cleaner gasoline production rules. By law, the downstream operators are required to mix renewable fuels (like corn ethanol or other biofuels) into gasoline and diesel. Recently, prices of U.S. renewable fuel credits — known as Renewable Identification Numbers, or RINs — hit record highs. This translates into additional operating cost for refiners who have to buy these RIN credits to meet the RFS standard. Already reeling under an environment of depressed profit margins, the additional cost of RINs has put most refiners under pressure.
Gasoline, Diesel Demand Comes Back With Increased Mobility: Per the U.S. Energy Department's latest release, gasoline inventories are around 3% below the five-year average, signaling robust oil product usage in the market. Of late, refiners like Marathon Petroleum (MPC - Free Report) have been supported by improvement in refined products consumption — primarily gasoline and diesel — on the back of increasing vaccinations and mobility. In fact, per Valero Energy (VLO - Free Report) , certain U.S. regions like the Gulf Coast and Mid-Continent are seeing demand exceeding the pre-pandemic levels. As economic activity takes off and Americans take to the road with a vengeance, refined products usage should continue to gain traction through the remainder of 2021.
Jet Fuel Weakness, Delta Variant Remain Complicating Factors: While refining fundamentals have certainly brightened from last year, the sector is not out of the woods yet in terms of cash flows that remain anemic and well below the pre-crisis levels. As a reflection of the struggles, Phillips 66 (PSX - Free Report) posted a refining loss of more than $700 million in the second quarter. The absence of the longer haul international flights and business travel is also a headwind, as it is keeping a lid on jet fuel demand (a derivative of distillates). This will not only affect refining profitability but also result in increased price volatility. Last but not the least, the rapidly spreading Delta variant outbreak has emerged as the latest threat to global economic recovery, particularly in China.
Zacks Industry Rank Indicates Gloomy Outlook
The Zacks Oil and Gas - Refining & Marketing is a 14-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #249, which places it in the bottom 2% 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 challenging 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 bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. While the industry’s earnings estimate for 2021 have decreased 79.6% in the past year, the same for 2022 have fallen 22.1% over the same timeframe.
Despite the dim near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and its current valuation first.
Industry Underperforms Sector & S&P 500
The Zacks Oil and Gas - Refining & Marketing industry has fared worse than the broader Zacks Oil - Energy sector as well as the Zacks S&P 500 composite over the past year.
The industry has grown 21% over this period compared to the S&P 500’s rise of 35.5% and broader sector’s increase of 23.7%.
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), the industry is currently trading at 27.45X, higher than the S&P 500’s 15.62X. It is also significantly above the sector’s trailing-12-month EV/EBITDA of 4.50X.
Over the past five years, the industry has traded as high as 156.80X, as low as 4.23X, with a median of 9.08X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Oil and Gas - Refining & Marketing Stocks to Focus On
World Fuel Services: World Fuel Services is engaged in marketing and selling marine, aviation, and land fuel products, plus associated services. In the second quarter, the Zacks Rank #2 (Buy) company saw volumes improve across its businesses. World Fuel Services is also focused on cost discipline, with its balance sheet strength and liquidity profile positioning it well to take advantage of increasing demand for the balance of the year.
The downstream operator, which approved a 20% increase to its quarterly cash dividend in March, has an expected earnings growth rate of 31.30% for the current year. World Fuel Services shares are up 10% so far this year.
Price and Consensus: INT
Murphy USA: It is a leading independent retailer of motor fuel and convenience merchandise in the United States. The proximity of Murphy USA’s fuel stations to Walmart supercenters helps the company to leverage the strong and consistent traffic that these stores attract. Murphy USA’s acquisition of QuickChek Corporation — a family-owned food and beverage chain located — is expected to help the company in improving its offerings.
Over the past 30 days, this El Dorado, AR-based firm has seen the Zacks Consensus Estimate for 2021 improve 13.4%. The company, which surpassed second-quarter bottom-line estimates on higher retail gasoline price and contribution from the QuickChek acquisition, carries a Zacks Rank #3 (Hold) and its shares are up 13.9% year to date.
Price and Consensus: MUSA
HollyFrontier: HollyFrontier is one of the largest independent oil refiners in the United States with a combined crude oil processing capacity of approximately 405,000 barrels per day. A major advantage for the company is the high complexity index — or the capability to process a wide mix of crude — and access to some of the fastest-growing domestic markets afforded by its portfolio of four refineries.
HollyFrontier, which recently beat second-quarter earnings estimates on better-than-expected refinery gross margins, has an expected earnings growth rate of 209.20% for the current year. The downstream operator carries a Zacks Rank #3 and its shares are up 14% since the beginning of 2021.
Price and Consensus: HFC
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Why Investors Should Focus on These 3 Refining & Marketing Stocks
While the Zacks Oil and Gas - Refining & Marketing industry is still far from normal, it appears that the space is on the mend. In particular, easing mobility restrictions and rising vaccination rates should help operators like HollyFrontier Corporation , Murphy USA (MUSA - Free Report) and World Fuel Services Corporation .
Industry Overview
The Zacks Oil and Gas - Refining & Marketing industry consists of companies that are involved in selling refined petroleum products (including heating oil, gasoline, jet fuel, 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 involves buying crude/other feedstocks, and processing them into a wide variety of refined products. Refining margins are extremely volatile and generally reflect the state of petroleum product inventories, demand for refined products, imports, regional differences, and capacity utilization in the refining industry. Other major determinants of refining profitability are the light/heavy and sweet/sour spreads.
3 Trends Defining the Oil and Gas - Refining & Marketing Industry's Future
Escalating RIN Cost a Major Setback: U.S. refiners are feeling the pinch of higher Renewable Fuel Standard (“RFS”) costs to comply with cleaner gasoline production rules. By law, the downstream operators are required to mix renewable fuels (like corn ethanol or other biofuels) into gasoline and diesel. Recently, prices of U.S. renewable fuel credits — known as Renewable Identification Numbers, or RINs — hit record highs. This translates into additional operating cost for refiners who have to buy these RIN credits to meet the RFS standard. Already reeling under an environment of depressed profit margins, the additional cost of RINs has put most refiners under pressure.
Gasoline, Diesel Demand Comes Back With Increased Mobility: Per the U.S. Energy Department's latest release, gasoline inventories are around 3% below the five-year average, signaling robust oil product usage in the market. Of late, refiners like Marathon Petroleum (MPC - Free Report) have been supported by improvement in refined products consumption — primarily gasoline and diesel — on the back of increasing vaccinations and mobility. In fact, per Valero Energy (VLO - Free Report) , certain U.S. regions like the Gulf Coast and Mid-Continent are seeing demand exceeding the pre-pandemic levels. As economic activity takes off and Americans take to the road with a vengeance, refined products usage should continue to gain traction through the remainder of 2021.
Jet Fuel Weakness, Delta Variant Remain Complicating Factors: While refining fundamentals have certainly brightened from last year, the sector is not out of the woods yet in terms of cash flows that remain anemic and well below the pre-crisis levels. As a reflection of the struggles, Phillips 66 (PSX - Free Report) posted a refining loss of more than $700 million in the second quarter. The absence of the longer haul international flights and business travel is also a headwind, as it is keeping a lid on jet fuel demand (a derivative of distillates). This will not only affect refining profitability but also result in increased price volatility. Last but not the least, the rapidly spreading Delta variant outbreak has emerged as the latest threat to global economic recovery, particularly in China.
Zacks Industry Rank Indicates Gloomy Outlook
The Zacks Oil and Gas - Refining & Marketing is a 14-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #249, which places it in the bottom 2% 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 challenging 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 bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. While the industry’s earnings estimate for 2021 have decreased 79.6% in the past year, the same for 2022 have fallen 22.1% over the same timeframe.
Despite the dim near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and its current valuation first.
Industry Underperforms Sector & S&P 500
The Zacks Oil and Gas - Refining & Marketing industry has fared worse than the broader Zacks Oil - Energy sector as well as the Zacks S&P 500 composite over the past year.
The industry has grown 21% over this period compared to the S&P 500’s rise of 35.5% and broader sector’s increase of 23.7%.
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), the industry is currently trading at 27.45X, higher than the S&P 500’s 15.62X. It is also significantly above the sector’s trailing-12-month EV/EBITDA of 4.50X.
Over the past five years, the industry has traded as high as 156.80X, as low as 4.23X, with a median of 9.08X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Oil and Gas - Refining & Marketing Stocks to Focus On
World Fuel Services: World Fuel Services is engaged in marketing and selling marine, aviation, and land fuel products, plus associated services. In the second quarter, the Zacks Rank #2 (Buy) company saw volumes improve across its businesses. World Fuel Services is also focused on cost discipline, with its balance sheet strength and liquidity profile positioning it well to take advantage of increasing demand for the balance of the year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
The downstream operator, which approved a 20% increase to its quarterly cash dividend in March, has an expected earnings growth rate of 31.30% for the current year. World Fuel Services shares are up 10% so far this year.
Price and Consensus: INT
Murphy USA: It is a leading independent retailer of motor fuel and convenience merchandise in the United States. The proximity of Murphy USA’s fuel stations to Walmart supercenters helps the company to leverage the strong and consistent traffic that these stores attract. Murphy USA’s acquisition of QuickChek Corporation — a family-owned food and beverage chain located — is expected to help the company in improving its offerings.
Over the past 30 days, this El Dorado, AR-based firm has seen the Zacks Consensus Estimate for 2021 improve 13.4%. The company, which surpassed second-quarter bottom-line estimates on higher retail gasoline price and contribution from the QuickChek acquisition, carries a Zacks Rank #3 (Hold) and its shares are up 13.9% year to date.
Price and Consensus: MUSA
HollyFrontier: HollyFrontier is one of the largest independent oil refiners in the United States with a combined crude oil processing capacity of approximately 405,000 barrels per day. A major advantage for the company is the high complexity index — or the capability to process a wide mix of crude — and access to some of the fastest-growing domestic markets afforded by its portfolio of four refineries.
HollyFrontier, which recently beat second-quarter earnings estimates on better-than-expected refinery gross margins, has an expected earnings growth rate of 209.20% for the current year. The downstream operator carries a Zacks Rank #3 and its shares are up 14% since the beginning of 2021.
Price and Consensus: HFC