U. S refiners cashing in on lower prices
Many companies are ‘ doing incredibly well’ despite oil’s fall
Energy stocks have been selling off so far this month as oil prices dip lower once again, but shares in U. S. refiners continue to show resilience and even strength amid the ongoing troubles.
“While most investors are experiencing a decline in the price of their energy stocks the refiners are doing incredibly well,” said Bob Sewell, chief executive of Bellwether Investment Management in Oakville, Ont.
U. S. crude futures have fallen 40 per cent over the past 12 months.
“The fall in oil prices is actually helping boost profits for the refiners because the price at the pump isn’t falling.”
Access to an abundance of cheap crude has led to better- than- average share returns for many of the biggest refiners south of the border over the past year.
Tesoro Corp., for instance, has soared 66 per cent over the past 12 months compared to a 24- percent drop in the S& P 500 energy sector index.
Marathon Petroleum Corp., another U. S. refiner, has climbed 51 per cent and Valero Energy Corp. is up 33 per cent.
Sewell believes these names should benefit further over the next few months because summer is usually a peak demand time for gas, but he is less certain about the future performance of Canadian integrated producers such as Suncor Energy Inc. and Cenovus Energy Inc., whose performance has “not been stellar to date.”
His favourite name overall is Marathon, which benefits from having a big retail business through its Speedway franchise, as well as from cost synergies related to the integration of stores that were purchased from Hess Corp. earlier this year.
Sewell is also bullish on Marathon’s announced merger with MarkWest Energy Partners LP., a natural gas processor based in Denver. The deal, which is valued at $ 15.8 billion US, has analysts excited about Marathon’s share price prospects.
Brad Heffern, analyst at RBC Capital Markets, said the combination could result in between $ 6 to $ 9 US per share of accretion
The fall in oil prices is actually helping boost profits for the refiners because the price at the pump isn’t falling.
to Marathon’s valuation.
He maintained Marathon as his top pick rating and raised his price target $ 67 US, representing upside close to 15 per cent based on the current share price near $ 58.70 US.
“There could be meaningful efficiencies with Marathon’s business, as MarkWest is the largest gas processor/ fractionator in the Utica/ Marcellus and Marathon consumes a significant amount of NGLs,” he said in a note.
“Marathon also noted that its strong balance sheet will allow MarkWest to accelerate organic growth, potentially doubling what is currently planned.”
Despite his optimism, Heffern noted there are several risks to his Marathon price target, the largest of which is an economic downturn in the U. S. that would have a substantial impact on product demand and refiner profitability.
The second risk, he added, is a lack of demand for U. S. gasoline and diesel exports, something the International Energy Agency also recently expressed as a concern in its latest oil market report.
“Surging U. S. gasoline demand since the oil price collapse has supported gasoline imports into the U. S. East Coast and beefed up refiners’ earnings worldwide, lifting global throughputs to records,” IEA said.
“This cannot last, given the challenge of finding a market outlet for the by- products of gasoline. Refining margins are already coming down from their highs.”