Zacks Industry Outlook Highlights PBF Energy, CVR Energy and Delek US
For Immediate Release
Chicago, IL – October 23, 2023 – Today, Zacks Equity Research discusses PBF Energy PBF, CVR Energy CVI and Delek US Holdings DK.
Industry: Oil & Gas - Refining
Link: https://www.zacks.com/commentary/2169353/these-3-refining-marketing-stocks-could-be-huge-winners
Light product inventories and tight supply/demand situations continue to support fundamentals in the Zacks Oil and Gas - Refining & Marketing industry. While profitability has declined significantly since the middle of 2022, it remains high enough for the constituent companies to generate better-than-expected earnings. If anything, Russia’s ban on gasoline exports has added to the strength in fuel prices.
Meanwhile, underinvestment in the space over the years has considerably shrunk the total refinery capacity, providing another tailwind for margins to stay at elevated levels. Building on this bullish narrative, there is a significant upside in downstream firms like PBF Energy, CVR Energy and Delek US Holdings.
Industry Overview
The Zacks Oil and Gas - Refining & Marketing industry consists of companies 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 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. Refining margins are extremely volatile and generally reflect the state of petroleum product inventories, demand for refined products, imports, regional differences, and capacity utilization in the refining industry. Other major determinants of refining profitability are the light/heavy and sweet/sour spreads. Refiners are also prone to unplanned outages.
3 Trends Defining the Oil and Gas - Refining & Marketing Industry's Future
Margins Remain Robust: While refining margins have moderated considerably from the spectacular levels of 2022, they are still relatively healthy. Crack spreads (or the difference between the price of refined products and crude oil), despite returning to more normalized levels, continue to be well above historical norms. Being the primary profit driver for oil and gas refining and marketing companies, a wide crack spread should ensure strong profits for downstream operators.
Ongoing Strength in Fuel Demand: Of late, refiners have been supported by a marked improvement in refined products’ consumption — primarily gasoline and diesel — on the back of increasing travel and mobility. Per the U.S. Energy Department's latest release, gasoline inventories are essentially in line with the five-year average, while distillate stocks are 12% below it, 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 remains resilient and Americans take to the road with a vengeance amid post-pandemic recovery, refined products’ usage should continue to gain traction throughout 2023. The refiners should also benefit from increased driving and accelerating international travel.
Supply-Chain Disruptions: Despite the relatively bullish energy landscape and improved demand environment, the industry has not been immune to supply-chain disruptions and cost inflation. Macro issues like higher transportation expenses, driver scarcity and labor shortages have limited refiners’ ability to ship packaged volumes to their customers. Most operators have also felt the impact of inflation, which is rolling through the cost structure. What’s worse is that these headwinds across the system and the subsequent hit to profitability (due to difficulty in passing through the increased costs to clients) are expected to continue in the near future.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas - Refining & Marketing is a 15-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #22, which places it in the top 9% 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 strong 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are getting optimistic about this group’s earnings growth potential. While the industry’s earnings estimates for 2023 have gone up 3.5% in the past couple of months, the same for 2024 have risen 6.9% over the same timeframe.
Considering the encouraging dynamics 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 current valuation first.
Industry Outperforms Sector But Lags S&P 500
Considering the bullish outlook of the Zacks Oil and Gas - Refining & Marketing industry, we advise loading up on companies like PBF, CVI and DK.
The Zacks Oil and Gas - Refining & Marketing industry has fared better than the broader Zacks Oil – Energy sector over the past year but has underperformed the Zacks S&P 500 composite over the same period.
The industry has gone up 16.9% over this period compared with the broader sector’s increase of 7.1%. Meanwhile, the S&P 500 has gained 18.2%.
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 2.82X, significantly lower than the S&P 500’s 12.91X. It is also below the sector’s trailing 12-month EV/EBITDA of 3.55X.
Over the past five years, the industry has traded as high as 6.76X, as low as 1.84X, with a median of 4.16X.
3 Stocks to Buy
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.
PBF, based in Parsippany, NJ, beat the Zacks Consensus Estimate for earnings in three of the last four quarters, the average being 8.3%. Over the past 60 days, this firm saw the Zacks Consensus Estimate for 2023 move up 19.4%. The Zacks Rank #1 (Strong Buy) PBF’s shares have gained 12.6% in a year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
CVR Energy: Established in 2006, CVR Energy is a holding company primarily involved in renewable energy, petroleum refining, marketing, and nitrogen fertilizer manufacturing through its stake in CVR Partners. It's committed to developing renewable biofuels and actively participating in the energy transition to reduce carbon emissions.
Over the past 60 days, Sugar Land, TX-based CVR Energy has seen the Zacks Consensus Estimate for 2023 improve 5%. CVR beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 28.8%. The company carries a Zacks Rank of 1. Shares of CVR Energy have lost 14.8% in a year.
Delek US Holdings: Founded in 2001, Brentwood, TN-based Delek US Holdings, Inc. is an independent refiner, transporter and marketer of petroleum products. The company’s operations are organized into three reportable segments: Refining, Logistics and Retail.
DK beat the Zacks Consensus Estimate for earnings in each of the trailing three quarters, the average being 29.4%. Over the past 60 days, this firm saw the Zacks Consensus Estimate for 2023 move up 18.8%. Valued at around $1.8 billion, the #1 Ranked Delek US Holdings has lost 3.9% in a year.
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CVR Energy Inc. (CVI) : Free Stock Analysis Report
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