Analyst Actions: Credit Suisse On US Independent Refiners - Rating Change For Alon USA Partners LP, Lifts Targets


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Credit Suisse on U.S. Independent Refiners says "4Q12 A Little Weaker But Raising LT Estimates; Rating Change for Alon USA Partners LP ( ALDW ); Raising Target Prices."

Bottom Line: "We raise 2013 EPS by 11% on the back of the slightly wider 2013 WTI-Brent spreads that were laid out in our Commodity report last week. However, we lower 4Q12 EPS for Alon USA Energy, Inc ( ALJ ), Delek US Holdings, Inc. ( DK ), Marathon Petroleum Corp ( MPC ) and Tesoro Corporation ( TSO ) on 1) seasonally weaker product pricing notably in the Gulf but also in the Mid-Continent and 2) non-margin related company specific issues (ALJ - removal of higher non-controlling interest in income, TSO - higher Bakken crude costs for a portion of Mandan's barrels). As US refiners run hard to benefit from cheap domestic crude, we note that winter gasoline prices could be under larger pressure than historically. We have adjusted the seasonality of Mid-Con product prices in our forwards EPS. This results in a negative adjustment, notably for HollyFrontier Corp (HFC) and MPC.

Key Themes in Refining: "As we outlined in our Energy 2013 outlook, we expect the Refiner equities to be influenced by the following main themes in 2013: (1) narrower WTI-LLS spreads as 1.6MBD of pipe capacity is added from the Permian/Cushing to the Gulf; (2) more persistent discounts in the Northern Mid-Con region i.e. Canadian, Bakken, Utica, as the pipes to evacuate these crudes to coastal markets will take longer to build; (3) continued appreciation of the free cash generation and the value of higher multiple businesses within the group which suggest the shares still offer value; (4) more evidence or otherwise that increases in the international refining cost structure could mean mid-cycle international margins are higher than we are modeling (see our Marginal Musings report; and (5) a recent uptrend in leading macro indicators and global oil demand - a potential boon to this high beta group.

Raising Target Prices: "We raise TP's for the group by c7% on higher mid-cycle earnings expectations following upward revisions to our LT WTI - Brent spread and underlying US Gulf Coast LLS margin."

Upgrade ALDW to O/P, Raise TP to $28/sh: "Since we launched coverage on ALDW (Jan 2nd, 2013), the AMZ index has outperformed by c13% (AMZ +7%, ALDW -6%). With a 2013 expected yield of c20% and c24% upside to our TP of $28, ALDW offers a 2013 total return of c44% which compares to 16% offered by the average MLP (7% yield + 9% upside to DDM).

Top Picks: We continue to favor those refiners with substantial non-refining value - MPC, TSO, Phillips 66 (PSX) and DK. Indeed MPC could be one of the best large cap refiners in 1H13 if management lay out disclosure/growth plans for MPLX, close the TX City Refinery transaction and continue returning cash to shareholders.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright (C) 2014 All rights reserved. Unauthorized reproduction is strictly prohibited.

This article appears in: Investing , Commodities
More Headlines for: ALDW , ALJ , DK , MPC , TSO

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