While most oil stocks have bounced back in 2016, U.S. refiner oil stocks have had an abysmal year so far.
Goldman Sachs analyst Neil Mehta recently took a deep dive into refiners Marathon Petroleum Corp (MPC), Phillips 66 (PSX), Tesoro Corporation (TSO), Valero Energy Corporation (VLO), HollyFrontier Corp (HFC), CVR Energy, Inc. (CVI) and CVR Refining LP (CVRR) and gave each stock a thumbs up or a thumbs down for investors.
So what did he think about each one? Read on to find out.
Oil Stocks to Buy: Marathon Petroleum Corp (MPC)
Goldman loves the diversification into nonrefining segments at MPC. Mehta predicts that MPC’s retail segment will provide an excellent hedge against rising Renewable Identification Number (RIN) prices and should see a boost from solid gasoline demand growth throughout the rest of 2016.
In addition, Goldman prefers coastal refiner oil stocks to mid-con refiners and notes that MPLX LP (MPLX) is up 96% from its February lows.
Goldman maintains a “buy” rating and a $44 price target for MPC.
Oil Stocks to Sell: Phillips 66 (PSX)
Mehta likes PSX management and praises the company’s nonrefining assets. In addition, Goldman likes the company’s potential for M&A as well. In fact, the firm includes a 15% M&A probability in its valuation.
Unfortunately, based on the Goldman’s sum-of-the-parts (SOTP) analysis, PSX’s $74 valuation represents significant downside from the stock’s recent share price. Of the six independent refiner oil stocks with market caps above $2 billion, PSX currently trades at by far the highest implied 2017 refining EV/EBITDA multiple (over 6x).
Due to its lofty valuation, Goldman maintains a “sell” rating on PSX.
Oil Stocks to Buy: Tesoro Corporation (TSO)
Mehta sees several reasons to like TSO. First, Goldman has a positive outlook for the California refining market. The firm also believes that TSO’s non-refining segments are underappreciated by the market.
TSO has limited risk from rising RINs and sports an attractive valuation on both a P/E and EV/EBITDA basis. Mehta estimates that the market is currently valuing TSO’s core refining business at only 2 EV/EBITDA. Goldman is projecting that TSO’s retail/marketing segment will achieve 9% CAGR from 2016 to 2019 due to store improvements, higher RINs and adding hundreds of new store locations.
Goldman has upgraded TSO from “neutral” to “buy” and has a $100 price target on the oil stock.
Oil Stocks to Buy: Valero Energy Corporation (VLO)
VLO is another example of a refiner that will reap the benefits of coastal exposure. Coastal refiners have unique access to discounted medium/heavy crudes, higher asset complexity and the opportunity to export product.
Goldman notes that VLO’s ethanol business should also help offset rising RINs prices.
Goldman maintains a “buy” rating and $68 price target for VLO.
Oil Stocks to Sell: HollyFrontier Corp (HFC)
Even though HFC is currently trading below book value, Mehta is wary of the oil stock’s low return on capital employed (ROCE).
HFC also has an extremely high exposure to the tight Brent-WTI spread, which creates substantial risk. Since HFC doesn’t have a large retail/wholesale business, higher RINs prices could be a significant headwind.
Goldman maintains a “sell” rating and a $22 price target for HFC.
Oil Stocks to Sell: CVR Energy, Inc. (CVI)/CVR Refining LP (CVRR)
Goldman predicts that the Brent-WTI spread will remain narrow until at least 2017, which will continue to pressure mid-con refiners like CVI. Mehta is also concerned by CVI’s relatively low coverage of its 12.6% dividend and sees “increasing potential for a dividend reduction” in 2016.
Goldman is more bearish about CVRR than either of the other two refining MLPs it covers.
Goldman maintains a “sell” rating on CVI and has a $15 price target for the oil stock. The firm also has a “sell” rating and $6.50 price target for CVRR.
As of this writing, Wayne Duggan had no positions in any of the stocks mentioned.