The Zacks Oil and Gas - Refining & Marketing industry appears on track for substantial gains as product demand and refining margins continue to move higher. Building on this bullish narrative, downstream firms like PBF Energy PBF, Valero Energy VLO, Murphy USA MUSA, Delek US Holdings DK and Marathon Petroleum MPC have lots of upside and are likely to see impressive revenue and cash flow growth.
Of late, refiners have been supported by a marked improvement in refined products consumption — primarily gasoline and diesel — on the back of increasing mobility. Per the U.S. Energy Department's latest release, gasoline inventories are around 10% below the five-year average, signaling robust oil product usage in the market. In other words, this indicates surging consumption of gasoline, diesel and other refined products. As economic activity takes off and Americans take to the road with a vengeance amid the post-pandemic recovery, refined products usage should continue to gain traction throughout 2022. The refiners are also set to benefit from increased summer driving and accelerating international travel.
The industry’s improved fundamentals in the form of constrained supply and robust demand have led to rising refining profitability for the players involved. With product inventories running low and no near-term solution to replenish them, margins (especially for diesel and jet fuel) have set all-time highs. Overall, elevated consumption paired with considerably lower refining capacity in the OECD countries should provide a tailwind for refinery profits throughout the year. In particular, constrained Russian fuel exports in the wake of the Ukraine conflict have further tightened refining fundamentals.
In fact. gasoline prices in the United States have repeatedly soared to new record highs. Motorists in more than 10 states are currently paying in excess of $5 for a gallon of regular gas at the petrol pump. The national average has gone up by 60 cents in just a month and is nearly $2 above the year-ago price. With millions of Americans on the move, the ‘pain at the pump’, or the trend of high gasoline prices, is expected to continue in the near-to-medium term.
Moreover, with the hurricane season just beginning and the country’s petrochemical/refining network being significantly exposed to the Gulf Coast, a severe storm could easily cut off supplies and push prices even higher.
All this adds up to the Zacks Oil and Gas - Refining & Marketing group currently carrying a Zacks Industry Rank #5 — placing it in the top 2% of more than 250 Zacks industries. The group’s excellent position indicates fairly strong near-term prospects for its constituent companies.
5 Refinery Stocks to Benefit From Strong Margins
Overall, given the tight fundamental set-up, fuel prices (and margins) are expected to stay strong. The upward trend should aid oil refining and marketing players.
To guide investors to the right picks, we highlight five companies that carry a Zacks Rank #1 (Strong Buy). The Zacks Rank is a reliable tool that helps you to trade with confidence regardless of your trading style and risk tolerance. To learn more about how you can use this proven system for market-beating gains, visit Zacks Rank Education.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) 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.
The 2022 Zacks Consensus Estimate for this Parsippany, NJ-based firm indicates 371.6% year-over-year earnings per share growth. PBF Energy beat the Zacks Consensus Estimate for earnings in three of the last four quarters, the average being 61.5%. The Zacks Rank #1 (Strong Buy) PBF’s shares are up 136.4% in a year.
Valero Energy: Among all the independent refiners, Valero offers the most diversified refinery base with a capacity of 3.1 million barrels per day in its 15 refineries located throughout the United States, Canada and the Caribbean. The majority of VLO’s refining plants are located in the Gulf coast area, from where there is easy access to the export facilities.
Valero has an expected earnings growth rate of 493.6% for the current year. VLO beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 84.3%. Valued at around $59.2 billion, the Zacks Rank #1 (Strong Buy) Valero has gained some 71.8% in a year.
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 located — is expected to help the company improve its offerings.
Over the past 60 days, this El Dorado, AR-based Murphy USA has seen the Zacks Consensus Estimate for 2022 improve 47.3%. MUSA, which surpassed first-quarter bottom-line estimates on higher retail gasoline price and margin, carries a Zacks Rank of 1 and its shares are up 77% in a year.
Delek US Holdings: Delek US Holdings is a diversified downstream energy company with an impressive profile of strategically located assets. DK’s refineries have a combined crude throughput capacity of 302,000 barrels per day. Delek’s retail segment seems to be a bright spot. Since 2016, the unit’s adjusted earnings per store have witnessed a CAGR of 18%. What's more, DK plans to add 50 stores by 2025 to double its segment earnings to $100 million.
The 2022 Zacks Consensus Estimate for this Brentwood, TN-based firm indicates 264.7% year-over-year earnings per share growth. Delek beat the Zacks Consensus Estimate for earnings in each of the last four quarters, the average being 172.3%. The #1 Ranked DK’s shares are up 36.1% in a year.
Marathon Petroleum: Marathon Petroleum Corporation is a leading independent refiner, transporter and marketer of petroleum products. MPC’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 of crude in the Permian, Bakken, and Canada helps it to benefit from the differentials.
Over the past 60 days, this Findlay, OH-based MPC has seen the Zacks Consensus Estimate for 2022 jump 105.7%. MPC, which surpassed first-quarter bottom-line estimates on stronger-than-expected performance from both segments, carries a Zacks Rank of 1 and its shares are up 75.9% in a year.
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