Industry Overview
The Zacks Oil and Gas - Refining & Marketing industry consists of companies involved in selling refined petroleum products (including heating oil, gasoline, jet fuel, residual oil, etc.) and a plethora of non-energy materials (like asphalt, road salt, clay and gypsum). Some companies also operate refined products’ terminals, storage facilities and transportation services. The primary activity of these firms involves buying crude/other feedstocks, and processing them into a wide variety of refined products. Refining margins are extremely volatile and generally reflect the state of petroleum product inventories, demand for refined products, imports, regional differences, and capacity utilization in the industry. Other major determinants of refining profitability are the light/heavy and sweet/sour spreads. Refiners are also prone to unplanned outages.
3 Trends Defining the Oil and Gas - Refining & Marketing Industry's Future
Margins to Remain Robust: While Refining margins, though lower than the highs of 2022, remain robust. Crack spreads, reflecting the gap between refined product prices and crude oil, are still comfortably above historical norms, ensuring profitability for downstream operators. Global oil demand peaked in 2023, with another record year expected in 2024. The IEA forecasts a demand growth of 1.3 million barrels per day. Demand for gasoline, diesel, and jet fuel remains steady both domestically and in exports. Despite slow capacity expansions, global supply constraints persist. Refining margins are expected to remain strong in 2024.
Refiners Poised for Growth Amid Rising Product Demand: Recently, refiners have benefited from strong demand for gasoline and diesel, driven by strength in travel and mobility. According to the U.S. Energy Department, gasoline inventories are about 1% below the five-year average, and distillate stocks are 8% lower, indicating robust market utilization. This highlights significant usage of oil products. As economic activity remains resilient and Americans engage in travel, consumption of refined products is expected to gain momentum throughout 2024, benefiting refiners from increased driving and international travel trends.
Supply-Chain Disruptions: Despite the relatively bullish energy landscape and improved demand environment, the industry has not been immune to supply-chain disruptions and cost inflation. Macro issues like higher transportation expenses, driver scarcity and labor shortages have limited refiners' ability to deliver volumes to their customers. What’s worse is that these headwinds across the system and the subsequent hit to profitability (due to difficulty in passing through the increased costs to clients) are expected to continue in the near future.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas - Refining & Marketing is a 15-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #94, which places it in the top 38% of 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Considering the encouraging dynamics of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector But Lags S&P 500
The Zacks Oil and Gas - Refining & Marketing industry has fared better than the broader Zacks Oil – Energy sector over the past year but has underperformed the Zacks S&P 500 composite over the same period.
The industry has gone up 26.1% over this period compared with the broader sector’s increase of 15.3%. Meanwhile, the S&P 500 has gained 27.4%.
One-Year Price Performance
Industry's Current Valuation
Since oil and gas companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of noncash expenses.
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 3.73X, significantly lower than the S&P 500’s 19.83X. However, it is above the sector’s trailing 12-month EV/EBITDA of 3.02X.
Over the past five years, the industry has traded as high as 6.76X, as low as 1.84X, with a median of 3.72X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Stocks in Focus
Valero Energy: San Antonio, TX-based Valero Energy is the largest independent refiner and marketer of petroleum products in the United States. The company has a refining capacity of 3.1 million barrels per day across 15 refineries located throughout the United States, Canada and the United Kingdom.
VLO’s expected EPS growth rate for three to five years is currently 6%, which compares favorably with the industry's growth rate of 4.9%. Valero Energy beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 12.1%. Shares of the Zacks Rank #3 (Hold) company have gained 37.3% in a year.
Price and Consensus: VLO
Murphy USA: It is a leading independent retailer of motor fuel and convenience merchandise in the United States. The proximity of Murphy USA’s fuel stations to Walmart supercenters helps the company leverage the strong and consistent traffic that these stores attract. MUSA’s acquisition of QuickChek Corporation — a family-owned food and beverage chain — is expected to help improve its offerings.
The El Dorado, AR-based Murphy USA has a market capitalization of $9.8 billion. MUSA beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters and missed in the other. The company carries a Zacks Rank of 3. Shares of MUSA have gained 60.2% in a year.
Price and Consensus: MUSA
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PBF Energy: PBF Energy has one of the most complex refining systems in the United States. As a result, the firm has the capacity to generate lighter and better grades of refined products. PBF’s daily processing capacity of 1,000,000 barrels of crude is higher than most of its peers.
PBF, based in Parsippany, NJ, beat the Zacks Consensus Estimate for earnings in three of the last four quarters. The firm has a market capitalization of $5.4 billion. The Zacks Rank #3 PBF’s shares have gained 10.1% in a year.
Price and Consensus: PBF
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Free: See Our Top Stock and 4 Runners Up >>Valero Energy Corporation (VLO) : Free Stock Analysis Report
Murphy USA Inc. (MUSA) : Free Stock Analysis Report
PBF Energy Inc. (PBF) : Free Stock Analysis Report
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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.
