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3 Refining & Marketing Stocks Resilient to Industry Challenges

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The economic disruption caused by the coronavirus outbreak and the associated demand destruction for refined products and transportation fuels have dulled the outlook for the Zacks Oil and Gas - Refining & Marketing industry.

While the refining economics remain largely unviable, industry players like Phillips 66 (PSX), Marathon Petroleum (MPC) and Murphy USA (MUSA) are expected to benefit from the modest uptick in utilization and gasoline demand.

Industry Overview

The Zacks Oil and Gas - Refining & Marketing industry consists of companies that are 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.

3 Trends Defining the Oil and Gas - Refining & Marketing Industry’s Future

Crack Spreads Hit by Low Utilization, Oil Price Rebound: In normal circumstances, the collapse in crude prices that accompanied the coronavirus-induced demand disruption would have been expected to strengthen refining margins (also known as crack spreads). However, a plunge in product usage over the same period meant that refiners like Valero Energy (VLO) and HollyFrontier (HFC) had to drastically curtail their utilization rates, resulting in lower revenues and cash flows. And now, the sharp rebound in oil prices — an input for refiners — has put the industry at an even bigger disadvantage by shrinking its already-weak margins.

Virus Resurgence Hampers Demand Recovery: Per the U.S. Energy Department's latest inventory release, distillate inventories are 11% above their respective five-year averages for this time of year, signaling plenty of oil products available in the market. Therefore, fuel margins remain depressed. Further, the reimposition of government measures to fight the spread of the pandemic’s second wave is expected to cause another consumption slowdown. Finally, despite the Thanksgiving-fueled temporary boost in air travel in the United States, the already dire jet fuel (a derivative of distillates) market is unlikely to rebound anytime soon. This will not only affect refining profitability but also result in increased price volatility.

Chinese Consumption Starting to Come Back:  On a slightly positive note, gasoline sales in the United States continued to tick up in recent months in a recovery from the historic lows as the economy reopened and lockdown measures imposed to curb the coronavirus pandemic were eased. While restrictions have returned in a number of countries to curb the fresh wave of the virus, they are not as drastic as the ones that followed immediately after the pandemic’s outbreak. Further, oil product demand in China — the world’s second-largest energy consumer — has been gradually increasing and is now almost back to the pre-pandemic levels. While overall usage remains well below pre-virus levels and stockpiles have bloated, the refining and marketing operators should benefit from improved activity that will also have a favorable impact on profitability.

Zacks Industry Rank Indicates Gloomy 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 #248, which places it in the bottom 2% 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 challenging 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 bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. While the industry’s earnings estimates for 2020 have decreased 131.3% in the past year, the same for 2021 have slumped 98.5% over the same timeframe.

Despite the dim near-term prospects 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 its current valuation first.

Industry Lags Sector & S&P 500

The Zacks Oil and Gas - Refining & Marketing industry has lagged the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 43.7% over this period compared to the S&P 500’s gain of 14.6% and broader sector’s decrease of 29.8%.

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 19.41X, higher than the S&P 500’s 15.92X. It is also well above the sector’s trailing-12-month EV/EBITDA of 4.78X.

Over the past five years, the industry has traded as high as 19.41X, as low as 4.15X, with a median of 7.75X, as the chart below shows.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)


3 Oil and Gas - Refining & Marketing Stocks to Focus On

Murphy USA: Murphy USA is a leading independent retailer of motor fuel and convenience merchandise in the United States. A low-cost, high-volume fuel seller, Murphy USA's stations are located near Walmart supercenters. This enables the company to attract significantly more transactions than its peers.

The 2020 Zacks Consensus Estimate for this El Dorado, AR-based company indicates 146.7% earnings per share growth over 2019. Murphy USA currently carries a Zacks Rank #3 (Hold). The stock has gained 12.1% over the past six months.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: MUSA


Marathon Petroleum: Marathon Petroleum'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 crude in the Permian, Bakken, and Canada helps it to benefit from the large differentials.

Over the past 30 days, Marathon Petroleum has seen the Zacks Consensus Estimate for 2020 improve 11.1%. The downstream operator carries a Zacks Rank #3 and its shares are up 15.3% over the past six months.

Price and Consensus: MPC

Phillips 66: Phillips 66 is the leading player in each of its operations like refining, chemicals and midstream in terms of size, efficiency and strength.  The company’s top-class asset portfolio, financial strength and ability to lower cost structure should boost shareholder returns

Over the past 30 days, Phillips 66 has seen the Zacks Consensus Estimate for 2020 improve 53.3%. The Houston-TX based firm carries a Zacks Rank #3 and its shares are down 14.2% over the past six months.

Price and Consensus: PSX


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Valero Energy Corporation (VLO) : Free Stock Analysis Report
Phillips 66 (PSX) : Free Stock Analysis Report
Murphy USA Inc. (MUSA) : Free Stock Analysis Report
Marathon Petroleum Corporation (MPC) : Free Stock Analysis Report
HollyFrontier Corporation (HFC) : Free Stock Analysis Report
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