With gasoline prices falling across the country, there are some concerns in the Zacks Oil and Gas - Refining & Marketing industry. Weighed down by shrinking margins, most sector operators are projected to post weaker year-over-year quarterly earnings in the remainder of 2023. Worse still, the rise in costs on the back of persistant inflation continues to eat into profits. Nevertheless, the space continues to benefit from strong product demand due to increasing travel and mobility. In the present environment, we advise investors to look at fundamentally solid companies like Marathon Petroleum MPC, Valero Energy VLO, Murphy USA MUSA and PBF Energy PBF.
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 refining 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
Softening Margin Backdrop: While refining margins are still relatively healthy, they have moderated considerably from the spectacular levels of 2022. Crack spreads (or difference between the price of refined products and crude oil) have come down too. Recessionary impact, if any, will drive down profitability further. With oil exports from Russia continuing to find new outlets like India and China despite price caps and sanctions, product supplies have not tightened to the extent that was expected. This implies that global refinery margins have lately lost steam, depressing the profits of the downstream companies.
Fuel Demand Remains Healthy: Of late, refiners have been supported by a marked improvement in refined products’ consumption — primarily gasoline and diesel — on the back of increasing travel and mobility. Per the U.S. Energy Department's latest release, gasoline inventories are around 7% below the five-year average, signaling robust oil product usage in the market. In other words, this indicates surging consumption of gasoline, diesel and other refined products. As economic activity remains resilient and Americans take to the road with a vengeance amid post-pandemic recovery, refined products’ usage should continue to gain traction throughout 2023. The refiners should also benefit from increased driving and accelerating international travel.
Ongoing Supply-Chain Bottlenecks: 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 ship packaged volumes to their customers. Most operators have also felt the impact of inflation, which is rolling through the cost structure. 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 a Bearish Outlook
The Zacks Oil and Gas - Refining & Marketing is a 16-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #164, which places it in the bottom 34% of some 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates fairly strong 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.
Despite the dim near-term prospects 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 inched up 1.2% over this period compared with the broader sector’s decline of 1%. Meanwhile, the S&P 500 has gained 4.4%.
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 1.34X, significantly lower than the S&P 500’s 12.17X. It is also below the sector’s trailing-12-month EV/EBITDA of 2.78X.
Over the past five years, the industry has traded as high as 6.90X, as low as 1.30X, with a median of 4.31X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
4 Stocks to Watch For
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 to leverage the strong and consistent traffic that these stores attract. MUSA’s acquisition of QuickChek Corporation — a family-owned food and beverage chain located — is expected to help improve its offerings.
Over the past 30 days, this El Dorado, AR-based Murphy USA has seen the Zacks Consensus Estimate for 2023 improve 2.2%. MUSA beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters, the average being 15.6%. The company carries a Zacks Rank #2 (Buy). Shares of MUSA have gained 11.5% in a year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: MUSA
Marathon Petroleum: The company is a leading independent refiner, transporter and marketer of petroleum products. MPC’s $23.3 billion acquisition of Andeavor has integrated the premier assets of both companies, bolstering the scale and leadership position of the combined entity in the United States. As it is, Marathon Petroleum's access to lower cost of crude in the Permian, Bakken, and Canada helps it to benefit from the differentials.
MPC beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 14.2%. Valued at around $47.4 billion, the Zacks Rank #3 (Hold) Marathon Petroleum has gained 14.8% in a year.
Price and Consensus: MPC
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 average being 18.5%. The Zacks #3 Ranked PBF’s shares are up 16% in a year.
Price and Consensus: PBF
Valero Energy: Among all the independent refiners, Valero offers the most diversified refinery base with a capacity of 3.1 million barrels per day in its 15 refineries located throughout the United States, Canada and the Caribbean. The majority of VLO’s refining plants are located in the Gulf Coast area, from where there is easy access to export facilities.
VLO beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 11.7%. Valued at around $40.1 billion, the Zacks Rank #3 Valero Energy has lost 11.3% in a year.
Price and Consensus: VLO
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