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Continued low inventories of light products and a tight supply/demand scenario are sustaining the fundamentals of the Zacks Oil and Gas - Refining & Marketing industry. Although profitability has decreased since mid-2022, it remains sufficiently high for constituent companies to surpass earnings expectations.
Additionally, years of underinvestment in the sector have significantly reduced total refinery capacity, providing an additional boost for margins to stay elevated. This positive outlook supports the potential upside for downstream firms such as Murphy USA, PBF Energy, CVR Energy and Delek US Holdings.
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
Steady Refining Margins Signal Robust Profits: Despite moderating from the remarkable highs of 2022, refining margins remain healthy. Crack spreads, the crucial difference between refined product prices and crude oil, are still comfortably above historical norms even as they return to more standard levels. These spreads, being the primary profit driver for oil and gas refining and marketing firms, bode well for downstream operators, ensuring robust profits despite the normalization.
Refiners Ride High on Strong Products Consumption: Lately, refiners have found support in robust consumption of their products, especially gasoline and diesel, driven by a resurgence in travel and mobility. The most recent release from the U.S. Energy Department reveals that gasoline inventories closely align with the five-year average, while distillate stocks are 4% below, indicating healthy utilization of oil products in the market.
Simply put, this points to notable usage of gasoline, diesel, and other refined products. With economic activity maintaining its resilience and Americans embracing travel in the wake of post-pandemic revival, the usage of refined products is expected to continue gaining momentum throughout 2024. Refiners are poised to benefit from increased driving activity and the accelerating trend of international travel.
Supply-Chain Challenges Persist: In the face of a generally positive energy outlook and a better demand scenario, the industry has not remained untouched by disruptions in the supply chain and cost increases. Broad-scale challenges such as increased transportation costs, a shortage of drivers, and labor scarcities have constrained refiners' capacity to deliver packaged volumes to their clients.
Additionally, the industry is grappling with the effects of inflation, which is impacting the overall cost structure. Compounding the situation is the ongoing difficulty in passing on the elevated costs to customers, resulting in continued challenges to profitability 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 #107, which places it in the top 43% 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 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.
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 5.1% over this period compared with the broader sector’s decrease of 6.3%. Meanwhile, the S&P 500 has gained 20.6%.
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 3.33X, significantly lower than the S&P 500’s 13.94X. It is also below the sector’s trailing 12-month EV/EBITDA of 3.62X.
Over the past five years, the industry has traded as high as 6.76X, as low as 1.84X, with a median of 3.95X.
4 Stocks to Watch
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 — is expected to help improve its offerings.
Over the past 90 days, El Dorado, AR-based Murphy USA has seen the Zacks Consensus Estimate for 2023 improve 13.3%. MUSA beat the Zacks Consensus Estimate for earnings in two of the trailing four quarters and missed in the other two, the average being 7%. The company carries a Zacks Rank #3 (Strong Buy). Shares of MUSA have gained 40.9% in a year.
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, the average beat being 9.3%. Over the past 90 days, this firm saw the Zacks Consensus Estimate for 2023 move up 9.8%. The Zacks Rank #3 PBF’s shares have gained 6.7% in a year.
CVR Energy: Established in 2006, CVR Energy is a holding company primarily involved in renewable energy, petroleum refining, marketing, and nitrogen fertilizer manufacturing through its stake in CVR Partners. It's committed to developing renewable biofuels and actively participating in the energy transition to reduce carbon emissions.
Sugar Land, TX-based CVR Energy’s Value and Growth Score of A each helps it to round out with a VGM Score of A. CVR beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 27.2%. The company carries a Zacks Rank of 3. Shares of CVR Energy have lost 5.4% in a year.
Delek US Holdings: Founded in 2001, Brentwood, TN-based Delek US Holdings, Inc. is an independent refiner, transporter and marketer of petroleum products. The company’s operations are organized into three reportable segments: Refining, Logistics and Retail.
DK beat the Zacks Consensus Estimate for earnings in each of the trailing three quarters, the average being 34.2%. The firm’s Value and Growth Score of A each helps it to round out with a VGM Score of A. Valued at around $1.6 billion, the #3 Ranked Delek US Holdings has lost 2.9% in a year.
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
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 Murphy USA, PBF Energy, CVR Energy and Delek US
For Immediate Release
Chicago, IL – January 17, 2024 – Today, Zacks Equity Research discusses Murphy USA (MUSA - Free Report) , PBF Energy (PBF - Free Report) , CVR Energy (CVI - Free Report) and Delek US Holdings (DK - Free Report) .
Industry: Oil & Gas - Refining & Marketing
Link: https://www.zacks.com/commentary/2210566/refining-marketing-landscape-augurs-well-for-these-4-stocks
Continued low inventories of light products and a tight supply/demand scenario are sustaining the fundamentals of the Zacks Oil and Gas - Refining & Marketing industry. Although profitability has decreased since mid-2022, it remains sufficiently high for constituent companies to surpass earnings expectations.
Additionally, years of underinvestment in the sector have significantly reduced total refinery capacity, providing an additional boost for margins to stay elevated. This positive outlook supports the potential upside for downstream firms such as Murphy USA, PBF Energy, CVR Energy and Delek US Holdings.
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
Steady Refining Margins Signal Robust Profits: Despite moderating from the remarkable highs of 2022, refining margins remain healthy. Crack spreads, the crucial difference between refined product prices and crude oil, are still comfortably above historical norms even as they return to more standard levels. These spreads, being the primary profit driver for oil and gas refining and marketing firms, bode well for downstream operators, ensuring robust profits despite the normalization.
Refiners Ride High on Strong Products Consumption: Lately, refiners have found support in robust consumption of their products, especially gasoline and diesel, driven by a resurgence in travel and mobility. The most recent release from the U.S. Energy Department reveals that gasoline inventories closely align with the five-year average, while distillate stocks are 4% below, indicating healthy utilization of oil products in the market.
Simply put, this points to notable usage of gasoline, diesel, and other refined products. With economic activity maintaining its resilience and Americans embracing travel in the wake of post-pandemic revival, the usage of refined products is expected to continue gaining momentum throughout 2024. Refiners are poised to benefit from increased driving activity and the accelerating trend of international travel.
Supply-Chain Challenges Persist: In the face of a generally positive energy outlook and a better demand scenario, the industry has not remained untouched by disruptions in the supply chain and cost increases. Broad-scale challenges such as increased transportation costs, a shortage of drivers, and labor scarcities have constrained refiners' capacity to deliver packaged volumes to their clients.
Additionally, the industry is grappling with the effects of inflation, which is impacting the overall cost structure. Compounding the situation is the ongoing difficulty in passing on the elevated costs to customers, resulting in continued challenges to profitability 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 #107, which places it in the top 43% 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 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.
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 5.1% over this period compared with the broader sector’s decrease of 6.3%. Meanwhile, the S&P 500 has gained 20.6%.
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 3.33X, significantly lower than the S&P 500’s 13.94X. It is also below the sector’s trailing 12-month EV/EBITDA of 3.62X.
Over the past five years, the industry has traded as high as 6.76X, as low as 1.84X, with a median of 3.95X.
4 Stocks to Watch
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 — is expected to help improve its offerings.
Over the past 90 days, El Dorado, AR-based Murphy USA has seen the Zacks Consensus Estimate for 2023 improve 13.3%. MUSA beat the Zacks Consensus Estimate for earnings in two of the trailing four quarters and missed in the other two, the average being 7%. The company carries a Zacks Rank #3 (Strong Buy). Shares of MUSA have gained 40.9% in a year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
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, the average beat being 9.3%. Over the past 90 days, this firm saw the Zacks Consensus Estimate for 2023 move up 9.8%. The Zacks Rank #3 PBF’s shares have gained 6.7% in a year.
CVR Energy: Established in 2006, CVR Energy is a holding company primarily involved in renewable energy, petroleum refining, marketing, and nitrogen fertilizer manufacturing through its stake in CVR Partners. It's committed to developing renewable biofuels and actively participating in the energy transition to reduce carbon emissions.
Sugar Land, TX-based CVR Energy’s Value and Growth Score of A each helps it to round out with a VGM Score of A. CVR beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 27.2%. The company carries a Zacks Rank of 3. Shares of CVR Energy have lost 5.4% in a year.
Delek US Holdings: Founded in 2001, Brentwood, TN-based Delek US Holdings, Inc. is an independent refiner, transporter and marketer of petroleum products. The company’s operations are organized into three reportable segments: Refining, Logistics and Retail.
DK beat the Zacks Consensus Estimate for earnings in each of the trailing three quarters, the average being 34.2%. The firm’s Value and Growth Score of A each helps it to round out with a VGM Score of A. Valued at around $1.6 billion, the #3 Ranked Delek US Holdings has lost 2.9% in a year.
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
See Stocks Free >>
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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.