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As fuel product supply remains constrained due to capacity rationalization triggered by the pandemic and demand continues to show strength on pent-up desire for travel, the Zacks Oil and Gas - Refining & Marketing industry is thriving. With the trends looking promising, downstream firms like Marathon Petroleum, Valero Energy, Murphy USA, PBF Energy and World Fuel Services have lots of upside and are likely to see impressive revenue and cash flow growth.
Industry Overview
The Zacks Oil and Gas - Refining & Marketing industry consists of companies 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. Refiners are also prone to unplanned outages.
3 Trends Defining the Oil and Gas - Refining & Marketing Industry's Future
Continued High Demand for Refined Products: Of late, refiners have been supported by a marked improvement in refined products consumption — primarily gasoline and diesel — on the back of increasing vaccinations and mobility. Per the U.S. Energy Department's latest release, gasoline inventories are around 7% below the five-year average, signaling robust oil product usage in the market. In other words, this indicates surging consumption of gasoline, diesel and other refined products.
As economic activity remains quite hot (with no visible sign of an imminent recession) and Americans take to the road with a vengeance amid the post-pandemic recovery, refined products usage should continue to gain traction throughout 2022. The refiners should also benefit from increased summer driving and accelerating international travel.
Extremely Healthy Margins: The industry's improved fundamentals in the form of constrained supply and robust demand have led to rising refining profitability for the players involved. With product inventories running low and no near-term solution to replenish them, margins (especially for diesel and jet fuel) have set all-time highs. While margins have moderated from those spectacular levels, they are still reasonably high.
Overall, elevated consumption paired with considerably lower refining capacity in the OECD countries should provide a tailwind for refinery profits throughout the year. In particular, constrained Russian fuel exports in the wake of the Ukraine conflict have further tightened refining fundamentals.
Sharp Rise in Costs: Despite the bullish energy landscape and improved demand environment, the industry has not been immune to supply-chain disruptions and cost inflation. Macro issues like higher transportation expenses, driver scarcity and labor shortages have limited refiners' ability to ship packaged volumes to their customers.
Most operators have also felt the impact of inflation, which is rolling through the cost structure. What's worse is that these headwinds across the system and the subsequent hit to profitability (due to difficulty in passing through the increased costs to clients) are expected to continue in the near future.
Zacks Industry Rank Indicates a Sunny Outlook
The Zacks Oil and Gas - Refining & Marketing is a 16-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #4, which places it in the top 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 fairly strong 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 a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are highly optimistic about this group's earnings growth potential. While the industry's earnings estimates for 2022 have increased 194.1% in the past year, the same for 2023 have risen 120.3% over the same timeframe.
Considering the encouraging dynamics 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 the current valuation first.
Industry Outperforms Sector, S&P 500
The Zacks Oil and Gas - Refining & Marketing industry has fared better than the broader Zacks Oil - Energy sector as well as the Zacks S&P 500 composite over the past year.
The industry has gained 52.2% over this period compared with the broader sector's increase of 41%. Meanwhile, the S&P 500 has lost 11.7%.
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 2.60X, significantly lower than the S&P 500's 12.53X. It is also below the sector's trailing-12-month EV/EBITDA of 3.61X.
Over the past five years, the industry has traded as high as 6.90X, as low as 2.12X, with a median of 4.75X.
5 Top Stocks to Buy Now
PBF Energy: PBF Energy has one of the most complex refining systems in the United States. As a result, the firm has the capacity to generate lighter and better grades of refined products. PBF's daily processing capacity of 1,000,000 barrels of crude is higher than most of its peers.
The 2022 Zacks Consensus Estimate for this Parsippany, NJ-based firm indicates 819.6% year-over-year earnings per share growth. PBF Energy beat the Zacks Consensus Estimate for earnings in each of the last four quarters, the average being 78%. Zacks Rank #1 (Strong Buy) PBF's shares are up 253.9% in a year.
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. MUSA's acquisition of QuickChek Corporation — a family-owned food and beverage chain located — is expected to help improve its offerings.
Over the past 60 days, this El Dorado, AR-based Murphy USA has seen the Zacks Consensus Estimate for 2022 improve 21.9%. MUSA, which surpassed second-quarter bottom-line estimates on contribution from the QuickChek acquisition and a higher retail margin, carries a Zacks Rank of 1 and its shares are up 92.4% in a year.
World Fuel Services: World Fuel Services is engaged in marketing and selling marine, aviation, and land fuel products, plus associated services. INT is also focused on cost discipline, with its balance sheet strength and liquidity profile positioning it well to take advantage of increasing product demand for the balance of the year.
The 2022 Zacks Consensus Estimate for this Miami, FL-based firm indicates 49.3% year-over-year earnings per share growth. World Fuel Services beat the Zacks Consensus Estimate for earnings in each of the last four quarters, the average being 23.7%. Zacks Rank #1 INT's shares are down 14.9% in a year.
Valero Energy: Among all the independent refiners, Valero offers the most diversified refinery base with a capacity of 3.1 million barrels per day in its 15 refineries located throughout the United States, Canada and the Caribbean. The majority of VLO's refining plants are located in the Gulf coast area, from where there is easy access to the export facilities.
Valero has an expected earnings growth rate of 833.8% for the current year. VLO beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 33.5%. Valued at around $48 billion, the Zacks Rank #2 (Buy) Valero has gained 87% in a year.
Marathon Petroleum: Marathon Petroleum Corporation is a leading independent refiner, transporter and marketer of petroleum products. MPC's $23.3 billion acquisition of Andeavor has integrated the premier assets of both the companies, bolstering the scale and leadership position of the combined entity in the United States. As it is, Marathon Petroleum's access to lower cost of crude in the Permian, Bakken, and Canada helps it to benefit from the differentials.
Over the past 60 days, this Findlay, OH-based MPC has seen the Zacks Consensus Estimate for 2022 improve 42.2%. MPC, which comfortably surpassed second-quarter bottom-line estimates on strong margins, carries a Zacks Rank of 2 and its shares are up 78.2% in a year.
Why Haven't You Looked at Zacks' Top Stocks?
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Marathon Petroleum, Valero Energy, Murphy USA, PBF Energy and World Fuel Services
For Immediate Release
Chicago, IL – August 31, 2022 – Today, Zacks Equity Research discusses Marathon Petroleum (MPC - Free Report) , Valero Energy (VLO - Free Report) , Murphy USA (MUSA - Free Report) , PBF Energy (PBF - Free Report) and World Fuel Services
Industry: Refining & Marketing
Link: https://www.zacks.com/commentary/1973887/5-stocks-to-reap-a-windfall-from-the-refining-marketing-industry
As fuel product supply remains constrained due to capacity rationalization triggered by the pandemic and demand continues to show strength on pent-up desire for travel, the Zacks Oil and Gas - Refining & Marketing industry is thriving. With the trends looking promising, downstream firms like Marathon Petroleum, Valero Energy, Murphy USA, PBF Energy and World Fuel Services have lots of upside and are likely to see impressive revenue and cash flow growth.
Industry Overview
The Zacks Oil and Gas - Refining & Marketing industry consists of companies 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. Refiners are also prone to unplanned outages.
3 Trends Defining the Oil and Gas - Refining & Marketing Industry's Future
Continued High Demand for Refined Products: Of late, refiners have been supported by a marked improvement in refined products consumption — primarily gasoline and diesel — on the back of increasing vaccinations and mobility. Per the U.S. Energy Department's latest release, gasoline inventories are around 7% below the five-year average, signaling robust oil product usage in the market. In other words, this indicates surging consumption of gasoline, diesel and other refined products.
As economic activity remains quite hot (with no visible sign of an imminent recession) and Americans take to the road with a vengeance amid the post-pandemic recovery, refined products usage should continue to gain traction throughout 2022. The refiners should also benefit from increased summer driving and accelerating international travel.
Extremely Healthy Margins: The industry's improved fundamentals in the form of constrained supply and robust demand have led to rising refining profitability for the players involved. With product inventories running low and no near-term solution to replenish them, margins (especially for diesel and jet fuel) have set all-time highs. While margins have moderated from those spectacular levels, they are still reasonably high.
Overall, elevated consumption paired with considerably lower refining capacity in the OECD countries should provide a tailwind for refinery profits throughout the year. In particular, constrained Russian fuel exports in the wake of the Ukraine conflict have further tightened refining fundamentals.
Sharp Rise in Costs: Despite the bullish energy landscape and improved demand environment, the industry has not been immune to supply-chain disruptions and cost inflation. Macro issues like higher transportation expenses, driver scarcity and labor shortages have limited refiners' ability to ship packaged volumes to their customers.
Most operators have also felt the impact of inflation, which is rolling through the cost structure. What's worse is that these headwinds across the system and the subsequent hit to profitability (due to difficulty in passing through the increased costs to clients) are expected to continue in the near future.
Zacks Industry Rank Indicates a Sunny Outlook
The Zacks Oil and Gas - Refining & Marketing is a 16-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #4, which places it in the top 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 fairly strong 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 a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are highly optimistic about this group's earnings growth potential. While the industry's earnings estimates for 2022 have increased 194.1% in the past year, the same for 2023 have risen 120.3% over the same timeframe.
Considering the encouraging dynamics 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 the current valuation first.
Industry Outperforms Sector, S&P 500
The Zacks Oil and Gas - Refining & Marketing industry has fared better than the broader Zacks Oil - Energy sector as well as the Zacks S&P 500 composite over the past year.
The industry has gained 52.2% over this period compared with the broader sector's increase of 41%. Meanwhile, the S&P 500 has lost 11.7%.
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 2.60X, significantly lower than the S&P 500's 12.53X. It is also below the sector's trailing-12-month EV/EBITDA of 3.61X.
Over the past five years, the industry has traded as high as 6.90X, as low as 2.12X, with a median of 4.75X.
5 Top Stocks to Buy Now
PBF Energy: PBF Energy has one of the most complex refining systems in the United States. As a result, the firm has the capacity to generate lighter and better grades of refined products. PBF's daily processing capacity of 1,000,000 barrels of crude is higher than most of its peers.
The 2022 Zacks Consensus Estimate for this Parsippany, NJ-based firm indicates 819.6% year-over-year earnings per share growth. PBF Energy beat the Zacks Consensus Estimate for earnings in each of the last four quarters, the average being 78%. Zacks Rank #1 (Strong Buy) PBF's shares are up 253.9% in a year.
You can see the complete list of today's Zacks #1 Rank stocks here.
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. MUSA's acquisition of QuickChek Corporation — a family-owned food and beverage chain located — is expected to help improve its offerings.
Over the past 60 days, this El Dorado, AR-based Murphy USA has seen the Zacks Consensus Estimate for 2022 improve 21.9%. MUSA, which surpassed second-quarter bottom-line estimates on contribution from the QuickChek acquisition and a higher retail margin, carries a Zacks Rank of 1 and its shares are up 92.4% in a year.
World Fuel Services: World Fuel Services is engaged in marketing and selling marine, aviation, and land fuel products, plus associated services. INT is also focused on cost discipline, with its balance sheet strength and liquidity profile positioning it well to take advantage of increasing product demand for the balance of the year.
The 2022 Zacks Consensus Estimate for this Miami, FL-based firm indicates 49.3% year-over-year earnings per share growth. World Fuel Services beat the Zacks Consensus Estimate for earnings in each of the last four quarters, the average being 23.7%. Zacks Rank #1 INT's shares are down 14.9% in a year.
Valero Energy: Among all the independent refiners, Valero offers the most diversified refinery base with a capacity of 3.1 million barrels per day in its 15 refineries located throughout the United States, Canada and the Caribbean. The majority of VLO's refining plants are located in the Gulf coast area, from where there is easy access to the export facilities.
Valero has an expected earnings growth rate of 833.8% for the current year. VLO beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 33.5%. Valued at around $48 billion, the Zacks Rank #2 (Buy) Valero has gained 87% in a year.
Marathon Petroleum: Marathon Petroleum Corporation is a leading independent refiner, transporter and marketer of petroleum products. MPC's $23.3 billion acquisition of Andeavor has integrated the premier assets of both the companies, bolstering the scale and leadership position of the combined entity in the United States. As it is, Marathon Petroleum's access to lower cost of crude in the Permian, Bakken, and Canada helps it to benefit from the differentials.
Over the past 60 days, this Findlay, OH-based MPC has seen the Zacks Consensus Estimate for 2022 improve 42.2%. MPC, which comfortably surpassed second-quarter bottom-line estimates on strong margins, carries a Zacks Rank of 2 and its shares are up 78.2% in a year.
Why Haven't You Looked at Zacks' Top Stocks?
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.