A prudent investment decision involves buying stocks that have solid prospects and selling those that carry risks. At times, it is rational to hold certain stocks that have enough potential but are weighed down by tough market conditions.
We believe PBF Energy Inc. PBF, with a market cap of $1.6 billion and five-year expected earnings per share growth rate of 41.9%, is a stock that investors should retain in their portfolio at the moment. Shares of the company have gained 32.4% over the past month compared with 15.3% rally of the industry it belongs to.
PBF Energy operates through six refineries that are spread across East Coast, Gulf Coast, West Coast and Mid-continent areas, representing a diversified asset base. The company’s daily processing capacity of 1,050,000 barrels of crude is higher than most of its peers.
The company has one of the most complex refining systems in the United States, with an overall Nelson Complexity Index reading of 12.8. This reflects that its oil refineries, having the capacity of generating lighter and better grades of refined products, are more sophisticated than most of the other refiners.
PBF Energy has taken some drastic measures to navigate through the current market uncertainty owing to the coronavirus pandemic. The steps include a reduction of $350 million in capital expenditures from its original 2020 guidance. PBF Energy also intends to lower operating expenses and suspend dividend payments. The refiner believes that these moves will lower 2020 cash outlays by more than $500 million.
PBF Energy has divested five hydrogen steam methane reformer plants to Air Products and Chemicals, Inc. for $530 million in cash. We appreciate the company’s asset monetization program, especially when the business scenario is unfavorable for refiners amid the coronavirus pandemic.
PBF Energy’s debt-to-capitalization ratio stands at 0.59, higher than the industry average of 0.36. In fact, the ratio has consistently been higher than the industry in the past few years. This reflects a more levered balance sheet than the industry. The company’s cash balance declined more than 11% year over year to $722.1 million in the first quarter. Its ability to clear a portion of the total debt of $2.6 billion is questionable since there has been prolonged weakness in global energy demand, without possibilities of recovery anytime soon.
Coronavirus-induced lockdowns and travel bans have destroyed the demand for energy. As such, the company reduced crude oil processing in refineries. It has idled several units in different refineries. Moreover, the refineries are currently running at minimum rates, resulting in a throughput reduction of around 30% from prior expectations.
Despite significant prospects as mentioned above, high debt burden and weak energy demand are concerns for the company. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth. Hence, investors might want to hold on to the stock, as it has ample prospects to outperform peers in the near future. As such, the stock currently carries a Zacks Rank #3 (Hold).
Some better-ranked players in the energy space include Chaparral Energy, Inc. CHAP, CNX Resources Corporation CNX and Concho Resources Inc. CXO, each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Chaparral Energy’s bottom line for 2020 is expected to rise 57.8% year over year.
CNX Resources beat earnings estimates thrice and met once in the last four quarters, with average positive surprise of 111.5%.
Concho Resources’ has a positive earnings surprise of 4.9% in the last four reported quarters.
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CNX Resources Corporation. (CNX) : Free Stock Analysis Report
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