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3 Refining & Marketing Stocks That Could be Huge Winners in 2024
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Moving forward, the Zacks Oil and Gas - Refining & Marketing industry will continue to be bolstered by the tight equilibrium between supply and demand for products. Despite the establishment of new refineries, global demand growth is set to outpace the production of refined products. The global refining capacity, inclusive of new installations, and demand for refined products, remain finely balanced. Given this favorable market environment, downstream firms such as Valero Energy (VLO - Free Report) , Murphy USA (MUSA - Free Report) and PBF Energy (PBF - Free Report) are poised to sustain robust earnings and generate substantial long-term value for shareholders.
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 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
Healthy Refining Margins Promise Robust Earnings: Despite easing from the remarkable highs of 2022, refining margins are still at healthy levels. Crack spreads, indicating the difference between refined product prices and crude oil, remain comfortably above historical benchmarks even as they revert to more typical ranges. These spreads, crucial for driving profits in oil and gas refining and marketing, augur well for downstream operators, ensuring robust profitability amid normalization. Looking at the refining landscape, global oil demand reached a peak in 2023, with expectations pointing to another record year in 2024. The IEA forecasts demand growth of around 1.3 million barrels per day. Demand for gasoline, diesel, and jet fuel remains steady year over year, both domestically and in exports. Global supply constraints persist, with expected capacity expansions progressing slower than anticipated. Looking ahead to 2024, above-average turnaround activity in the first quarter and the shift to summer gasoline blends are expected to bolster refining margins.
Strong Product Consumption Trends Signal Growth Ahead: In recent times, refiners have received a boost from the robust consumption of their products, particularly gasoline and diesel, propelled by a resurgence in travel and mobility. The latest data from the U.S. Energy Department indicates that gasoline inventories are approximately 3% below the five-year average, while distillate stocks are 7% lower, signaling robust utilization of oil products in the market. In essence, this underscores the significant usage of gasoline, diesel, and other refined products. With economic activity maintaining its resilience and Americans embracing travel as part of the post-pandemic revival, the consumption of refined products is anticipated to continue gaining momentum throughout 2024. Refiners stand to benefit from increased driving activity and the accelerating trend of international travel.
Challenges Affecting the Energy Industry's Supply Chain: Amid a generally optimistic energy outlook and improved demand conditions, the industry has not escaped disruptions in the supply chain and rising costs. Widespread challenges such as heightened transportation expenses, driver shortages, and labor scarcities have hindered refiners' ability to deliver volumes to their customers. Moreover, the industry is contending with the effects of inflation, which are impacting the overall cost framework. Adding to the complexity is the ongoing struggle to pass on these increased costs to customers, leading to sustained profitability challenges in the foreseeable future.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas - Refining & Marketing is a 15-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #65, which places it in the top 26% 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 solid 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.
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 current valuation first.
Industry Outperforms Sector But Lags S&P 500
The Zacks Oil and Gas - Refining & Marketing industry has fared better than the broader Zacks Oil – Energy sector over the past year but has underperformed the Zacks S&P 500 composite over the same period.
The industry has gone up 26.2% over this period compared with the broader sector’s increase of 12.8%. Meanwhile, the S&P 500 has gained 27%.
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 4.03X, significantly lower than the S&P 500’s 15.03X. It is also below the sector’s trailing 12-month EV/EBITDA of 4.40X.
Over the past five years, the industry has traded as high as 6.76X, as low as 1.84X, with a median of 3.75X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Stocks to Buy
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 leverage the strong and consistent traffic that these stores attract. MUSA’s acquisition of QuickChek Corporation — a family-owned food and beverage chain — is expected to help improve its offerings.
Over the past 60 days, El Dorado, AR-based Murphy USA has seen the Zacks Consensus Estimate for 2024 improve 6.7%. MUSA beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters and missed in the other, the average being 13.6%. The company carries a Zacks Rank #1 (Strong Buy). Shares of MUSA have gained 63.2% in a year.
Valero Energy: San Antonio, TX-based Valero Energy is the largest independent refiner and marketer of petroleum products in the United States. The company has a refining capacity of 3.1 million barrels per day across 15 refineries located throughout the United States, Canada and the United Kingdom.
VLO’s expected EPS growth rate for three to five years is currently 6%, which compares favorably with the industry's growth rate of 5.6%. Valero Energy beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 10.7%. Shares of the Zacks Rank #2 (Buy) company have gained 35.7% in a year.
Price and Consensus: VLO
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.
PBF, based in Parsippany, NJ, beat the Zacks Consensus Estimate for earnings in three of the last four quarters. Over the past 60 days, this firm saw the Zacks Consensus Estimate for 2024 move up 8.4%. The Zacks Rank #2 PBF’s shares have gained 48.5% in a year.
Price and Consensus: PBF
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3 Refining & Marketing Stocks That Could be Huge Winners in 2024
Moving forward, the Zacks Oil and Gas - Refining & Marketing industry will continue to be bolstered by the tight equilibrium between supply and demand for products. Despite the establishment of new refineries, global demand growth is set to outpace the production of refined products. The global refining capacity, inclusive of new installations, and demand for refined products, remain finely balanced. Given this favorable market environment, downstream firms such as Valero Energy (VLO - Free Report) , Murphy USA (MUSA - Free Report) and PBF Energy (PBF - Free Report) are poised to sustain robust earnings and generate substantial long-term value for shareholders.
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 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
Healthy Refining Margins Promise Robust Earnings: Despite easing from the remarkable highs of 2022, refining margins are still at healthy levels. Crack spreads, indicating the difference between refined product prices and crude oil, remain comfortably above historical benchmarks even as they revert to more typical ranges. These spreads, crucial for driving profits in oil and gas refining and marketing, augur well for downstream operators, ensuring robust profitability amid normalization. Looking at the refining landscape, global oil demand reached a peak in 2023, with expectations pointing to another record year in 2024. The IEA forecasts demand growth of around 1.3 million barrels per day. Demand for gasoline, diesel, and jet fuel remains steady year over year, both domestically and in exports. Global supply constraints persist, with expected capacity expansions progressing slower than anticipated. Looking ahead to 2024, above-average turnaround activity in the first quarter and the shift to summer gasoline blends are expected to bolster refining margins.
Strong Product Consumption Trends Signal Growth Ahead: In recent times, refiners have received a boost from the robust consumption of their products, particularly gasoline and diesel, propelled by a resurgence in travel and mobility. The latest data from the U.S. Energy Department indicates that gasoline inventories are approximately 3% below the five-year average, while distillate stocks are 7% lower, signaling robust utilization of oil products in the market. In essence, this underscores the significant usage of gasoline, diesel, and other refined products. With economic activity maintaining its resilience and Americans embracing travel as part of the post-pandemic revival, the consumption of refined products is anticipated to continue gaining momentum throughout 2024. Refiners stand to benefit from increased driving activity and the accelerating trend of international travel.
Challenges Affecting the Energy Industry's Supply Chain: Amid a generally optimistic energy outlook and improved demand conditions, the industry has not escaped disruptions in the supply chain and rising costs. Widespread challenges such as heightened transportation expenses, driver shortages, and labor scarcities have hindered refiners' ability to deliver volumes to their customers. Moreover, the industry is contending with the effects of inflation, which are impacting the overall cost framework. Adding to the complexity is the ongoing struggle to pass on these increased costs to customers, leading to sustained profitability challenges in the foreseeable future.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas - Refining & Marketing is a 15-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #65, which places it in the top 26% 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 solid 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.
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 current valuation first.
Industry Outperforms Sector But Lags S&P 500
The Zacks Oil and Gas - Refining & Marketing industry has fared better than the broader Zacks Oil – Energy sector over the past year but has underperformed the Zacks S&P 500 composite over the same period.
The industry has gone up 26.2% over this period compared with the broader sector’s increase of 12.8%. Meanwhile, the S&P 500 has gained 27%.
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 4.03X, significantly lower than the S&P 500’s 15.03X. It is also below the sector’s trailing 12-month EV/EBITDA of 4.40X.
Over the past five years, the industry has traded as high as 6.76X, as low as 1.84X, with a median of 3.75X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Stocks to Buy
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 leverage the strong and consistent traffic that these stores attract. MUSA’s acquisition of QuickChek Corporation — a family-owned food and beverage chain — is expected to help improve its offerings.
Over the past 60 days, El Dorado, AR-based Murphy USA has seen the Zacks Consensus Estimate for 2024 improve 6.7%. MUSA beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters and missed in the other, the average being 13.6%. The company carries a Zacks Rank #1 (Strong Buy). Shares of MUSA have gained 63.2% in a year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: MUSA
Valero Energy: San Antonio, TX-based Valero Energy is the largest independent refiner and marketer of petroleum products in the United States. The company has a refining capacity of 3.1 million barrels per day across 15 refineries located throughout the United States, Canada and the United Kingdom.
VLO’s expected EPS growth rate for three to five years is currently 6%, which compares favorably with the industry's growth rate of 5.6%. Valero Energy beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 10.7%. Shares of the Zacks Rank #2 (Buy) company have gained 35.7% in a year.
Price and Consensus: VLO
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.
PBF, based in Parsippany, NJ, beat the Zacks Consensus Estimate for earnings in three of the last four quarters. Over the past 60 days, this firm saw the Zacks Consensus Estimate for 2024 move up 8.4%. The Zacks Rank #2 PBF’s shares have gained 48.5% in a year.
Price and Consensus: PBF