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Refiners Tumble on Proposed Biofuel Quotas

- By Alberto Abaterusso

The stock prices of several refiners plunged following the Trump administration's proposal for refiners to use 15 billion gallons of conventional renewable fuels next year.

This quota - in line with the requirements the previous administration guided for 2017 - represents 10.5% of the total gasoline consumption of 143.5 billion gallons forecasted by analysts for 2018.


Through the American Petroleum Institute, refining companies have asked the Environmental Protection Agency to reduce the quota - computed as a percentage of the total gasoline consumption forecasted for 2018 - to 9.7%. This percentage equates to approximately 13.9 billion gallons of renewable fuels.

Some refiners have even suggested lowering the quota to 50 basis points below the blend rate of 10%. This request has opened a dispute with the Renewable Fuels Association (RFA), who consider the threshold a creation of the oil industry to weaken the support for the Renewable Fuel Standard (RFS) - which requires a minimum volume of renewable fuels blended for transportation fuel sold in the U.S.

A 10.5% quota for renewable fuels on a gasoline consumption demand that is forecasted to increase 0.35% from 2017 to 2018 may have a negative impact on the downstream sector of the oil and gas industry as lower levels of non-renewable fuels throughput usually determines an increase in operating costs.

The EPA's deadline to decide the final quotas for biofuels in 2018 is Nov. 30. For the time being, analysts do not want to count their chicks before they hatch, so their ratings for most of the refiners' stocks do not go beyond a hold recommendation.

Valero Energy Corp. (VLO) closed at $67.07 per share, down 95 cents or 1.40% from the previous trading day. The company has a market capitalization of $30 billion, a price-book (P/B) ratio of 1.51, a price-sales (P/S) ratio of 0.39, a price-earnings (P/E) ratio of 14.67 and an EV/EBITDA ratio of 6.64. The refiner pays an annual dividend of $2.80 through quarterly payments of 70 cents, for a dividend yield of 4.12%. Valero is the only energy stock analysts gave a buy recommendation for, with a rating of 2.3 out of 5. The average target price is $74.17 per share.

CVR Energy Inc. (CVI) closed at $21.39 per share yesterday, down 73 cents or 3.30% from the previous trading day, with a volume of 523,698 shares traded on the New York Stock Exchange. The company has a market capitalization of $1.86 billion, a P/B ratio of 2.22, a P/S ratio of 0.34 and a P/E ratio of 29.63. The EV/EBITDA ratio is 7.78. The refining company pays an annual dividend of $2 through quarterly payments of 50 cents, for a dividend yield of 9.04%. The stock has a recommendation rating of 3 out of 5.

CVR Refining LP (CVRR) closed at $9.20 per share, down 50 cents or 5.15% from the previous trading day. The refiner has a market capitalization of $1.36 billion, a P/B ratio of 1, a P/S ratio of 0.27, a P/E ratio of 9.04 and an EV/EBITDA ratio of 4.56. The stock has a recommendation rating of 3.1 out of 5, for an average target price per share of $10.14.

PBF Energy Inc. (PBF) closed at $22.27 per share, down 51 cents or 2.24% from the previous trading day. The refiner has a market capitalization of $2.53 billion, a P/B ratio of 1.24, a P/S ratio of 0.14, a P/E ratio of 13.33 and an EV/EBITDA ratio of 6.56. PBF Energy pays an annual dividend of $1.20 through quarterly payments of 30 cents, for a dividend yield of 5.27%. The stock has a recommendation rating of 2.8 out of 5, for a target price of $25.59 per share.

HollyFrontier Corp. (HFC) tumbled $1.15 or 4.10% to $26.88 per share. The market capitalization is $4.72 billion and the volume of shares traded yesterday on the New York Stock Exchange was 2,373,309. The refiner currently has a P/B ratio of 1.03, a P/S ratio of 0.41, a P/E ratio of -14.41 and an EV/EBITDA ratio of 45. The company pays an annual dividend of $1.32 through quarterly payments of 33 cents, for a dividend yield of 4.71%. The stock has a recommendation rating of 3 out of 5, for an average target price per share of $30.92.

Disclosure: I have no positions in any stock mentioned in this article.

This article first appeared on GuruFocus.


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