Analyst Actions: Credit Suisse On US Independent Refiners - Upgrades Delek, Marathon and Phillips

Jumping On The "USA MLP" Bandwagon: UPGRADING Delek US Holdings Inc. ( DK ), Marathon Petroleum Corp ( MPC ) and Phillips 66 ( PSX ) to OUTPERFORM (from Neutral); Raising TPs.

Bottom Line: Last month, when we took the sector to Market Weight, we were worried that a fall in margins and WTI-LLS spreads through 2013 would interrupt the upswing for the group that is justified by their improved free cash generation. Today, we're jumping on the "USA MLP" bandwagon to argue that the MLP valuation uplift, mainly for logistic assets but also for variable refining MLP's, provides a significant offset. Higher regular dividends would not hurt either. In this note we conclude (1) Logistic MLP's can drive valuations higher. PSX and DK have the most logistics value in current EV (2) Variable rate MLP's would need to beat an 11% mid-cycle yield to be accretive to our C-Corp EV/EBITDA valuations. We raise TPs and upgrade PSX/DK/MPC to Outperform.

Raising Refining Target Prices (again): We believe managements will initially focus on logistic MLPs. Based on work in this report, we raise refiner target prices by c8%. Indeed at current valuations, 40-50% of the value of PSX and DK would be supported by our logistics fair value alone. There is now c50% upside to theoretical value across the group.

What is the right multiple for logistic MLP spin-outs? Given MLP's typically start small and then grow, we are less interested in near term EV/EBITDA multiples. We attempt to quantify the correct multiple for a company that states "we have say $500m of EBITDA that could be dropped into an MLP over time". We suggest a fair multiple seems to be 8-10x EV/EBITDA (after tax). This will depend on the longer term Treasury yield, the risk premium for MLP assets, the level of deferred taxation benefit from the MLP formation and corporate performance.

Upside for Refining or Ethane MLP's Would Require a Mid-Cycle Yield Less than 11% or Greater Tax Deferral: NTI is trading on a mid-cycle distributable yield of c12% or 7.1x EV/EBITDA (2015). This compares with the C-Corp average of 4.6x. Working the math, unless c-corps can increase the tax deferral of the MLP distributions, the market would need to accept less than an 11% mid-cycle yield to create EV/EBITDA accretion vs our target c-corp valuations.

Refining Is More Suitable for MLP's Than Perhaps People Realize: With the bulk of the Independent's EBITDA in the mid-con region, free cash generation and hence MLP suitability looks quite high. On a back cast, Refiner MLPs (including Gulf names) could have paid variable dividends in 33 of the last 40 quarters.

Raise the Regular: As an alternative to launching variable rate MLP's, for those management teams looking to force equity value higher and confident in their free cash generation, we say "Raise the Regular" dividend

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

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

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