Wells Fargo Securites
Independent refiners remain well-positioned amid a tough overall energy environment.
In order of upside potential our top picks are Delek US Holdings (ticker: DK ), PBF Energy ( PBF ) and Valero Energy ( VLO ). We continue to favor complex, export-oriented refiners such as Marathon Petroleum ( MPC ), Phillips 66 ( PSX ) and Valero.
We are utilizing this midquarter update to true-up our fourth-quarter and fiscal 2015 estimates and to highlight which refiners have the greatest upside potential to our estimates, as many refiners have moved meaningfully higher since our last full update in early October.
Our 2016-2017 outlook is effectively unchanged. We are lowering our 2015 earnings-per-share estimates for all companies except Phillips 66 (increasing). Our 2016-2017 estimates and valuation ranges remain unchanged for all except Tesoro ( TSO ) (2016 EPS estimate goes to $8.14 from a prior $8.26).
Relative to the beginning of the quarter, crack spreads have eroded more than we anticipated. However, the changes quarter-to-date are within historical seasonal norms. Given a strong forward crack spread curve, we remain comfortable with our 2016 earnings and cash flow estimates.
Overall, refining managements and boards have been good stewards of refining shareholder value by restraining expansionary refining capital expenditure, increasing dividends and pursuing share repurchases. While the 2016 capital-expenditure budgets have not been finalized for all companies, our initial review indicates that U.S. refining growth capital expenditure is likely to be slightly lower in 2016 as compared to 2015 investments. For an industry operating at a high level of utilization and above historical levels of profitability, this is a surprising level of restraint in our view.
-- Roger D. Read
-- Lauren Hendrix