Refiners And the Fed’s Stance on December’s Possible Rate Hike
What You Need to Know about the Refining Industry
Interest coverage ratio
After the FOMC’s 1 meeting on October 28, the probability of a rate hike in the month of December grew higher. Since October 28, refiners have risen by an average of 7% to date compared to a flat S&P 500 index (SPY). However, the average interest coverage ratio of the ten large capped refiners stood at 9x. The refiners that are more sensitive towards the change in interest rates are Alon USA Energy (ALJ), CVR Refining (CVRR), and Tesoro (TSO). Their EBIT (earnings before interest and taxes) to interest expenses equaled 1.7x, 5x, and 6x, respectively.
Growth of debt
The graph above showed the growth in debt and weighted average cost of debt of the ten large capped refiners. Marathon Petroleum’s (MPC) total debt has almost doubled in 3Q15 compared to the same quarter in the previous year. The company’s total debt grew by 95%. However, its interest coverage ratio was at 14x, and its weighted average cost of debt was at 1.9%. Chevron’s numbers were the highest interest coverage ratio and lowest weighed average cost of debt, respectively, among the refiners.
The total debt of Tesoro (TSO) and PBF Energy (PBF) grew by an approximate 50% and 70%, respectively. Refiners CVR Refining (CVRR) and Northern Tier Energy (NTI) both have a weighted average cost of debt around 3.6% compared to MPC and TSO at 1.9% and 2.2%, respectively. The total debt of Chevron, a large capped integrated energy company, grew by 36% on a year-over-year basis, in 3Q15. The Energy Select Sector SPDR Fund (XLE) invests 11.9% of its portfolio in Chevron.
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