Credit Suisse says: "Cutting Near Term EPS But Drawing a Line in
the Sand - Rating Changes to Alon USA Energy, Inc (
), Western Refining, Inc (
); Reinstating Valero Energy Corporation (
) with Neutral; Revising TPs."
Bottom Line: "The US Refiners have a large competitive moat from
cheap crude, cheap natural gas, the ability to process cheap heavy
crude and their economies of scale. As we flagged in the Great LLS
Debate, we felt there was a risk WTI-Brent spreads could compress
as early as April 2013. This indeed occurred and we cut our 2013
EPS today (2Q by 19%, 3Q by 22%) to reflect this early transition
from "supernormal" to "normal" earnings. We stress our mid-cycle
earnings power is unaffected and mid-cycle target valuations are
40-50% above current share prices. Global macro indicators look too
weak for the group to rally hard - but we'd like to draw a line in
the sand after a c15% correction from recent highs."
Several themes stand out:
Marathon Petroleum Corp (
), VLO and Tesoro Corporation (
) Could Still Grow Earnings vs a "Supernormal 2012" Despite
Narrower WTI-Brent. Self-help and for MPC/VLO a reduction in Gulf
coast crude input costs suggest the best may still be ahead.
Market Still Not Appreciating Logistics Value: While it will
take time to monetize logistics in the MLP market place, there is
substantial logistics value in the refining peers. Indeed, we see
logistics value as a key driver of absolute upside and relative
Lots of Firepower to Defend Share Prices: All but three refiners
are net cash today and the average free cash yield is c11% on
mid-cycle earnings. Managements have substantial firepower to
defend against share price weakness.
TSO and MPC preferred: We find most value in MPC (logistics,
Galveston Bay, Mid-Con earnings power) and in TSO (Carson City,
Mid-Con earnings power, operational turnarounds).
We reinstate on VLO with Neutral Rating: In a separate report
out today, we reinstate on VLO. We believe VLO can grow earnings
but that MPC and TSO offer more value.
Downgrade ALJ to Underperform: Although ALJ shares have absolute
upside, there is less upside than peers. In line with Credit Suisse
balanced recommendations, we lower to Underperform.
Upgrade WNR to Outperform: WNR has had a strong turnaround
performance over the past 2 years. Upcoming catalysts that could
drive the share price higher include 1) expanding the El Paso
refinery 2) launching a Logistics MLP and 3) raising shareholder
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