Oil refiner PBF Energy (NYSE:PBF) was formed in 2008 when private equity experts Blackstone Group (NYSE:BX) saw opportunity in the decade’s energy shortage. PBF stock began trading in 2012.
Now, after falling in price by over 76% in 2020, a victim of the pandemic’s falling demand, investment managers at Blackrock (NYSE:BLK) see opportunity. They’ve bought 14% of the shares.
This is good news for PBF, which is fighting for its life. It’s burning through $100 million in cash each month in refining oil and has just $2 billion in liquidity. PBF hopes to cut the burn in half, but Blackrock obviously sees an end to it.
If Blackrock is right, PBF is a bargain.
The PBF Story
At $7 per share, PBF has a market cap of just $840 million. During the third quarter alone, it had revenues of nearly $3.7 billion, but lost $417 million, $3.49 per share, on those sales.
PBF was formed with east coast refinery assets. In mid-2019 it agreed to buy Shell’s (NYSE:RDS.A) Martinez, California refinery, near San Francisco, for $1.2 billion. The deal closed in February, right before the pandemic stalled the economy. At the time PBF called Martinez “a top-tier asset.”
The deal gave PBF growth, but at the price of volatility. The company lost $8.93 per share during the March quarter, earned $3.23 per share during the June quarter, then swung to another loss.
The profit came after it sold five hydrogen plants to Air Products & Chemicals (NYSE:APD) for $530 million and cut its capital spending by $240 million. It suspended the dividend, cut headquarters staff, and then shut most production at a New Jersey refinery, laying off 250.
During the third quarter, cash flow turned negative. Morgan Stanley (NYSE:MS) recently downgraded PBF to “underweight” and it was forced to pay interest of 9.25% to sell $250 million in notes.
What Blackrock Sees
Oil refineries produce a variety of products, from tar and fuel oil at the bottom of their crackers to gasoline and jet fuel near the top. In July, PBF told analysts it would have to shut down production, despite rising gas prices, because it couldn’t sell the jet fuel.
In the short term there’s a major crisis in the refinery business. No one wants refineries. Some are just shutting down.
PBF remains the fourth-largest U.S. refiner, running at less than 80% of its capacity. But the end of the pandemic, and rising demand for transportation, could mean a quick return to profits next year.
Over the longer run the situation looks bleak. China should become the world’s largest refiner in 2021. India will double its refining capacity over the next five years.
The Bottom Line
Blackrock is getting in at what it sees as a bottom. PBF did $24 billion of business in 2019 and, if estimates are correct, should do $16.7 billion in 2020.
If Blackrock is seen as a strong hand, PBF profits could rise sharply in 2021, along with the stock price.
But this is institutional speculation. Refining is moving to where demand is strongest, which is Asia. U.S. demand for gasoline should drop as electric cars take hold. PBF could export some of that gasoline to Latin America and the Caribbean. But the long-term future looks bad and there’s over $5.5 billion in debt. That’s why PBF’s new debt cost so much.
If you do follow Blackrock into PBF stock, make sure you have an exit strategy. My guess is they do.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.
