The Zacks Oil and Gas – Refining & Marketing segment continues to benefit from strong fundamentals, strong margins and strong fuel demand. As global product supply is expected to remain constrained for some time due to capacity reductions, downstream operators should benefit from a bullish landscape in the short to medium term. With trends looking promising, turnaround and marketing companies like Marathon Oil MPC, Phillips 66 PSX, United States Musa and PBF Energy PBF still has a long way to go and should see impressive revenue and cash flow growth.
Industry overview
The Zacks Oil and Gas – Refining & Marketing industry consists of businesses involved in the sale of refined petroleum products (including fuel oil, gasoline, jet fuel, residual oil, etc.) and a plethora of materials non-energetic (such as asphalt, road salt, clay and gypsum). Some of the companies also operate refined product terminals, storage facilities and transportation services. The main activity of these companies is to buy crude or other raw materials and process 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 refining industry. The other major determinants of refining profitability are light/heavy and sweet and sour spreads. Refiners are also prone to unplanned outages.
3 Trends Shaping the Future of the Oil & Gas Industry – Refining & Marketing
Strong demand for refined products: Lately, refiners have been supported by a marked improvement in the consumption of refined products – mainly gasoline and diesel – thanks to increased travel and mobility. According to the latest release from the US Department of Energy, gasoline inventories are about 4% lower than the five-year average, indicating robust use of petroleum products in the market. In other words, this indicates an increase in the consumption of gasoline, diesel and other refined products. As economic activity remains hot (with no visible signs of an impending recession) and Americans hit the road with a vengeance amid the post-pandemic recovery, refined product use is expected to continue to gain traction throughout throughout 2022. Refiners should also benefit from increased drive and faster international travel.
Attractive margins: Improving industry fundamentals in the form of constrained supply and robust demand have led to an increase in refining profitability for the players involved. With product inventories low and no near-term solution to replenish them, margins (particularly for diesel and jet fuel) hit historic highs earlier this year. Although margins have moderated from these spectacular levels, they remain reasonably high. Overall, high consumption coupled with significantly lower refining capacity in OECD countries should support refinery profits throughout the year. In particular, limited Russian fuel exports following the Ukraine conflict further tightened refining fundamentals.
Higher costs and inflationary pressures: Despite the bullish energy landscape and improving demand environment, the industry has not been immune to supply chain disruptions and cost inflation. Macroeconomic issues such as higher freight costs, driver shortages and labor shortages have limited refiners’ ability to ship packaged volumes to their customers. Most operators have also felt the impact of inflation, which affects the cost structure. What’s worse is that these headwinds through the system and the subsequent impact on profitability (due to the difficulty in passing on increased costs to customers) are likely to continue for the foreseeable future.
Zacks’ Industry Ranking Indicates Sunny Outlook
Zacks Oil and Gas – Refining & Marketing is a group of 16 stocks within the broader Zacks Oil – Energy sector. The industry currently carries a Zacks Industry ranking of #25, which places it in the top 10% of over 250 Zacks industries.
The group’s Zacks Industry Rank, which is essentially the average of the Zacks ranking of all member stocks, indicates a pretty solid near-term outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of industries ranked by Zacks is the result of a positive earnings outlook for the constituent companies overall. Looking at revisions to overall earnings estimates, it seems analysts are very optimistic about the earnings growth potential of this group. While industry earnings estimates for 2022 are up 159.7% over the past year, the same for 2023 are up 143.2% over the same period.
Given the encouraging momentum in the industry, we’ll outline a few stocks you may want to consider for your portfolio. But it’s worth taking a look at industry shareholder returns and current valuation first.
Industry outperforms sector and S&P 500
The Zacks Oil and Gas – Refining & Marketing industry has fared better than the broader Zacks Oil – Energy sector as well as the Zacks S&P 500 composite over the past year.
The industry gained 45% during this period, compared to an increase of 31.4% for the sector as a whole. Meanwhile, the S&P 500 lost 15.8%.
Year-over-year price performance
Current industry assessment
Since oil and gas companies are indebted, it makes sense to value them based on the EV/EBITDA (Enterprise Value/Earnings before Interest Tax Depreciation and Amortization) ratio. Indeed, the valuation measure takes into account not only equity, but also the level of indebtedness. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changes in capital structures and ignores the effect of non-cash expenses.
Based on the trailing 12-month enterprise value to EBITDA (EV/EBITDA) ratio, the sector is currently trading at 2.35X, significantly below the S&P 500’s 12.22X. It is also below EV/ Segment trailing 12-month EBITDA of 3.39X.
Over the past five years, the industry has traded as low as 6.90X, as low as 1.89X, with a median of 4.67X, as seen in the chart below.
Rolling 12-month enterprise value/EBITDA (EV/EBITDA) ratio (last five years)
4 best stocks to buy now
Marathon Oil: Marathon Petroleum Corporation is a major independent refiner, transporter and marketer of petroleum products. MPC’s acquisition of Andeavor for $23.3 billion integrated the core assets of both companies, strengthening the scale and leadership position of the combined entity in the United States. As it stands, Marathon Petroleum’s access to lower cost crude in the Permian, Bakken and Canada helps it benefit from differentials.
Marathon Petroleum has an expected profit growth rate of 949% for the current year. MPC has beaten the Zacks consensus estimate for earnings in each of the past four quarters, averaging 60.1%. Valued at around $58.9 billion, Zacks Rank #1 (Strong Buy) Marathon Petroleum has gained 104.7% in one year.
You can see the full list of today’s Zacks #1 Rank stocks here.
Pricing and Consensus: MPC
Phillips 66: Phillips 66 is one of the leading refiners in terms of size, efficiency and strength. The company buys, sells and refines crude oil and other raw materials in its refineries. PSX, with a throughput capacity of 2 million barrels per day, has interests in 12 refineries in the United States and Europe. Additionally, it has 7,110 branded outlets in the United States and 1,700 internationally.
Phillips 66 has an expected earnings growth rate of 261.8% for the current year. PSX has beaten the Zacks consensus estimate for earnings in each of the past four quarters, averaging 28.1%. Valued at around $52.3 billion, the Zacks Rank #2 (Buy) Phillips 66 has gained 59.9% in one year.
Pricing and Consensus: PSX
Murphy United States: It is one of the leading independent retailers of fuel and convenience products in the United States. The proximity of Murphy USA’s gas stations to Walmart supercenters helps the company capitalize on the large and consistent traffic these stores attract. MUSA’s acquisition of QuickChek Corporation, a family-owned food and beverage chain, should help improve its offerings.
Over the past 60 days, El Dorado, AR-based Murphy USA has seen the Zacks consensus estimate for 2022 improve by 5.2%. MUSA, which beat third-quarter net profit estimates on retail gasoline price and margin growth, has a Zacks ranking of 2. MUSA shares are up 61.5% year-on-year .
Pricing and Consensus: MUSA
PBF Energy: PBF Energy has one of the most complex refining systems in the United States. As a result, the company has the ability to generate lighter and better grades of refined products. PBF’s daily crude processing capacity of 1,000,000 barrels is greater than most of its peers.
The Zacks 2022 consensus estimate for the Parsippany, N.J.-based company points to earnings per share growth of 1,048.8% year-over-year. PBF Energy has beaten the Zacks consensus estimate for earnings in each of the past four quarters, averaging 49%. Shares of #2 PBF-rated Zacks are up 282.1% in one year.
Pricing and Consensus: PBF
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