Analyst Actions: Credit Suisse On U.S. Independent Refiners - Rating Changes to Alon USA Energy, Western Refining

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Credit Suisse says: "Cutting Near Term EPS But Drawing a Line in the Sand - Rating Changes to Alon USA Energy, Inc ( ALJ ), Western Refining, Inc ( WNR ); Reinstating Valero Energy Corporation ( VLO ) 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 ( MPC ), VLO and Tesoro Corporation ( TSO ) 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 stock selection.

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 distributions.



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

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This article appears in: Investing , Commodities

Referenced Stocks: ALJ , MPC , TSO , VLO , WNR

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