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Refining & Marketing Industry Red-Hot Right Now: 5 Stocks to Buy
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The Zacks Oil and Gas - Refining & Marketing industry appears on track for substantial gains as product demand and refining margins continue to move higher. Building on this bullish narrative, downstream firms like Marathon Petroleum (MPC - Free Report) , Valero Energy (VLO - Free Report) , Murphy USA (MUSA - Free Report) , PBF Energy (PBF - Free Report) , and Delek US Holdings (DK - Free Report) 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
Growing Fuel Demand: 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 3% 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 takes off 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 are also set to benefit from increased summer driving and accelerating international travel.
Strong 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. 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.
Input Cost Inflation, Supply Constraints: 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 the refining companies' 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 Sunny 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 #23, which places it in the top 9% 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 70% in the past year, the same for 2023 have risen 93.1% 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 grown 46% over this period compared to the S&P 500’s rise of just 3.3% and the broader sector’s increase of 42.6%.
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), the industry is currently trading at 10.67X, lower than the S&P 500’s 13.98X. It is, however, significantly above the sector’s trailing-12-month EV/EBITDA of 4.93X.
Over the past five years, the industry has traded as high as 199.94X, as low as 4.35X, with a median of 10.15X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
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 256.8% year-over-year earnings per share growth. PBF Energy beat the Zacks Consensus Estimate for earnings in two of the last four quarters, the average being 52.4%. The Zacks Rank #1 (Strong Buy) PBF’s shares are up 92.2% 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 247% for the current year. VLO beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 75.7%. Valued at around $42.2 billion, the Zacks Rank #2 (Buy) Valero has gained some 47.9% in a year.
Price and Consensus: VLO
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 the company improve its offerings.
Over the past 60 days, this El Dorado, AR-based Murphy USA has seen the Zacks Consensus Estimate for 2022 improve 6.7%. MUSA, which surpassed fourth-quarter bottom-line estimates on contribution from the QuickChek acquisition and a higher retail margin, carries a Zacks Rank of 2 and its shares are up 70.2% in a year.
Price and Consensus: MUSA
Delek US Holdings: Delek US Holdings is a diversified downstream energy company with an impressive profile of strategically located assets. DK’s refineries have a combined crude throughput capacity of 302,000 barrels per day. Delek’s retail segment seems to be a bright spot. Since 2016, the unit’s adjusted earnings per store have witnessed a CAGR of 18%. What's more, DK plans to add 50 stores by 2025 to double its segment earnings to $100 million.
The 2022 Zacks Consensus Estimate for this Brentwood, TN-based firm indicates 163% year-over-year earnings per share growth. Delek beat the Zacks Consensus Estimate for earnings in three of the last four quarters, the average being 38.1%. The #2 Ranked DK’s shares are down 2.6% in a year.
Price and Consensus: DK
Marathon Petroleum: Marathon Petroleum 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 46.3%. MPC, which surpassed fourth-quarter bottom-line estimates on stronger-than-expected performance from both segments, carries a Zacks Rank of 2 and its shares are up 62.1% in a year.
Price and Consensus: MPC
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Refining & Marketing Industry Red-Hot Right Now: 5 Stocks to Buy
The Zacks Oil and Gas - Refining & Marketing industry appears on track for substantial gains as product demand and refining margins continue to move higher. Building on this bullish narrative, downstream firms like Marathon Petroleum (MPC - Free Report) , Valero Energy (VLO - Free Report) , Murphy USA (MUSA - Free Report) , PBF Energy (PBF - Free Report) , and Delek US Holdings (DK - Free Report) 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
Growing Fuel Demand: 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 3% 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 takes off 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 are also set to benefit from increased summer driving and accelerating international travel.
Strong 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. 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.
Input Cost Inflation, Supply Constraints: 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 the refining companies' 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 Sunny 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 #23, which places it in the top 9% 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 70% in the past year, the same for 2023 have risen 93.1% 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 grown 46% over this period compared to the S&P 500’s rise of just 3.3% and the broader sector’s increase of 42.6%.
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), the industry is currently trading at 10.67X, lower than the S&P 500’s 13.98X. It is, however, significantly above the sector’s trailing-12-month EV/EBITDA of 4.93X.
Over the past five years, the industry has traded as high as 199.94X, as low as 4.35X, with a median of 10.15X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
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 256.8% year-over-year earnings per share growth. PBF Energy beat the Zacks Consensus Estimate for earnings in two of the last four quarters, the average being 52.4%. The Zacks Rank #1 (Strong Buy) PBF’s shares are up 92.2% in a year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: PBF
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 247% for the current year. VLO beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 75.7%. Valued at around $42.2 billion, the Zacks Rank #2 (Buy) Valero has gained some 47.9% in a year.
Price and Consensus: VLO
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 the company improve its offerings.
Over the past 60 days, this El Dorado, AR-based Murphy USA has seen the Zacks Consensus Estimate for 2022 improve 6.7%. MUSA, which surpassed fourth-quarter bottom-line estimates on contribution from the QuickChek acquisition and a higher retail margin, carries a Zacks Rank of 2 and its shares are up 70.2% in a year.
Price and Consensus: MUSA
Delek US Holdings: Delek US Holdings is a diversified downstream energy company with an impressive profile of strategically located assets. DK’s refineries have a combined crude throughput capacity of 302,000 barrels per day. Delek’s retail segment seems to be a bright spot. Since 2016, the unit’s adjusted earnings per store have witnessed a CAGR of 18%. What's more, DK plans to add 50 stores by 2025 to double its segment earnings to $100 million.
The 2022 Zacks Consensus Estimate for this Brentwood, TN-based firm indicates 163% year-over-year earnings per share growth. Delek beat the Zacks Consensus Estimate for earnings in three of the last four quarters, the average being 38.1%. The #2 Ranked DK’s shares are down 2.6% in a year.
Price and Consensus: DK
Marathon Petroleum: Marathon Petroleum 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 46.3%. MPC, which surpassed fourth-quarter bottom-line estimates on stronger-than-expected performance from both segments, carries a Zacks Rank of 2 and its shares are up 62.1% in a year.
Price and Consensus: MPC