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Tighter Gasoline Supplies to Aid Oil & Gas Refining & Marketing Industry
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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 involves 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:
Per the EIA, gasoline supply surplus is virtually gone, with inventories of the prime transportation fuel in the United States standing at the five-year average. Coupled with a record high domestic demand, crack spreads – a measure of refining profitability – have widened significantly, almost doubling from the first-quarter average. The improving crack spread is likely to drive both revenues and earnings of the sector components.
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 refiners with the opportunity to buy lower cost American oil and sell products at higher international-linked prices.
Deteriorating U.S.-China trade relations have cast a pall over the gasoline demand outlook. Moreover, slowing industrial growth in China – the world's second-biggest consumer of the fuel after America – is expected to keep prices depressed. As it is, the loss of Venezuela’s heavy grade oil has put U.S. refiners in a difficult position. Shrinking WTI-Brent crude differentials might also weigh on margins for refining and marketing companies. This is because refined products, which are exported worldwide, use WTI crude as inputs but are priced higher than Brent.
Zacks Industry Rank Indicates Bright 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 #101, which places it in the top 40% 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.
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 27.4% over this period compared with the sector’s decrease of 14.9%. The S&P 500 meanwhile rose 5.9% .
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 7.08X, lower than the S&P 500’s 11.29X. However, it is significantly above the sector’s trailing-12-month EV/EBITDA of 4.96X.
Over the past five years, the industry has traded as high as 15.63X, as low as 4.43X, with a median of 7.35X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
Shortage in the Permian takeaway capacity in the face of exponential production growth has forced producers to sell their crude at a discount. The downstream companies whose refining capacity is leveraged to lower Permian pricing are poised for significant bottom-line growth.
On a further encouraging note, gasoline futures recently shot up to their highest in more than a month on Philadelphia Energy Solutions’ decision to permanently close its oil refinery in Philadelphia following last week’s devastating fire.
However, 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 narrowing discount in U.S. oil prices to Brent, petroleum exporters' profits are expected to be hurt. This, in turn, will limit cash flow generation at the companies with downstream exposure.
None of the stocks in the Zacks Oil and Gas - Refining & Marketing industry sports a Zacks Rank #1 (Strong Buy). However, we present a stock that has a Zacks Rank #2 (Buy) and is well positioned to grow. There are also three stocks with a Zacks Rank #3 (Hold) that investors may currently retain.
Delek US Holdings, Inc. (DK - Free Report) : Delek US Holdings is an independent refiner, transporter and marketer of petroleum products. The Brentwood, TN-based company carries a Zacks Rank #2. Over the past 30 days, Delek US holdings has seen the Zacks Consensus Estimate for 2019 and 2020 increase 2.3% and 1.4% to $4.51 and $4.32 per share, respectively.
Price and Consensus: DK
Marathon Petroleum Corporation (MPC - Free Report) : This Findlay, OH-based company, which carries a Zacks Rank #3, is a leading independent refiner, transporter and marketer of petroleum products. Marathon Petroleum’s expected EPS growth rate for three to five years currently stands at 8.6%, comparing favorably with the industry's growth rate of 7.5%.
Price and Consensus: MPC
Par Pacific Holdings, Inc. (PARR - Free Report) : It is a diversified energy company with a portfolio of refining, infrastructure, retail as well as exploration and production assets. Zacks #3 Ranked Par Pacific Holdings is headquartered in Houston, TX and has an expected earnings growth rate of 40.6% for 2019.
Price and Consensus: PARR
HollyFrontier Corporation : HollyFrontier is one of the largest independent refiners and marketers of petroleum products in the United States. Carrying a Zacks Rank of 3, this Dallas, TX-headquartered company’s expected EPS growth rate for three to five years currently stands at 10.2%, comparing favorably with the industry's growth rate of 7.5%.
Price and Consensus: HFC
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Tighter Gasoline Supplies to Aid Oil & Gas Refining & Marketing Industry
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 involves 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:
Zacks Industry Rank Indicates Bright 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 #101, which places it in the top 40% 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.
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 27.4% over this period compared with the sector’s decrease of 14.9%. The S&P 500 meanwhile rose 5.9% .
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 7.08X, lower than the S&P 500’s 11.29X. However, it is significantly above the sector’s trailing-12-month EV/EBITDA of 4.96X.
Over the past five years, the industry has traded as high as 15.63X, as low as 4.43X, with a median of 7.35X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
Shortage in the Permian takeaway capacity in the face of exponential production growth has forced producers to sell their crude at a discount. The downstream companies whose refining capacity is leveraged to lower Permian pricing are poised for significant bottom-line growth.
On a further encouraging note, gasoline futures recently shot up to their highest in more than a month on Philadelphia Energy Solutions’ decision to permanently close its oil refinery in Philadelphia following last week’s devastating fire.
However, 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 narrowing discount in U.S. oil prices to Brent, petroleum exporters' profits are expected to be hurt. This, in turn, will limit cash flow generation at the companies with downstream exposure.
None of the stocks in the Zacks Oil and Gas - Refining & Marketing industry sports a Zacks Rank #1 (Strong Buy). However, we present a stock that has a Zacks Rank #2 (Buy) and is well positioned to grow. There are also three stocks with a Zacks Rank #3 (Hold) that investors may currently retain.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Delek US Holdings, Inc. (DK - Free Report) : Delek US Holdings is an independent refiner, transporter and marketer of petroleum products. The Brentwood, TN-based company carries a Zacks Rank #2. Over the past 30 days, Delek US holdings has seen the Zacks Consensus Estimate for 2019 and 2020 increase 2.3% and 1.4% to $4.51 and $4.32 per share, respectively.
Price and Consensus: DK
Marathon Petroleum Corporation (MPC - Free Report) : This Findlay, OH-based company, which carries a Zacks Rank #3, is a leading independent refiner, transporter and marketer of petroleum products. Marathon Petroleum’s expected EPS growth rate for three to five years currently stands at 8.6%, comparing favorably with the industry's growth rate of 7.5%.
Price and Consensus: MPC
Par Pacific Holdings, Inc. (PARR - Free Report) : It is a diversified energy company with a portfolio of refining, infrastructure, retail as well as exploration and production assets. Zacks #3 Ranked Par Pacific Holdings is headquartered in Houston, TX and has an expected earnings growth rate of 40.6% for 2019.
Price and Consensus: PARR
HollyFrontier Corporation : HollyFrontier is one of the largest independent refiners and marketers of petroleum products in the United States. Carrying a Zacks Rank of 3, this Dallas, TX-headquartered company’s expected EPS growth rate for three to five years currently stands at 10.2%, comparing favorably with the industry's growth rate of 7.5%.
Price and Consensus: HFC
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.
his outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
See their latest picks free >>