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A Top-Performing Refiner May Have Climbed Too High -- Barrons.comA Top-Performing Refiner May Have Climbed Too High -- Barrons.com Dow Jones By Avi Salzman One of the energy stocks that has rebounded sharply off the bottom now appears to have gotten ahead of itself, according to Goldman Sachs analyst Neil Mehta. Refiner PBF Energy (ticker: PBF) is up 114% since March 23, versus a 74% gain for its peers. Mehta's downgrade appears to be cutting into those gains, however. Shares were down 7.3% on Wednesday morning to $11.18. In a note published late on Tuesday, Mehta cut his rating to Sell, with a $10 price target. The downgrade is another sign that analysts are becoming more skeptical of some of the top performers during the energy rebound. Analysts have also grown more wary of other stocks like Chevron (CVX) that have outperformed their peers. Energy investors need to watch valuation, even of the companies that made smart moves to conserve cash early in the pandemic. There are good reasons why PBF rose in the first place. It's particularly well-situated to benefit from rising gasoline prices. PBF has its headquarters in Parsippany, N.J., close to markets on the East Coast, where margins on gasoline have been stronger than in other parts of the country. And PBF was quick to secure its balance sheet. "The company has reduced 2020 capital spending forecasts, cut operating/corporate costs, suspended its quarterly dividend payments, and monetized five hydrogen plants for $530 million in cash proceeds," Mehta wrote. "PBF also recently issued $1 billion in debt to provide incremental cash proceeds. These actions, in our view, have given investors greater confidence around the company's ability to navigate this challenging period." But with the stock having more than doubled, the next step will be trickier. In the next few years, refiners are expected to add capacity more quickly than demand will grow, pressuring companies in the industry. While other refiners like Marathon Petroleum (MPC) have other business operations like gas stations, PBF is focused heavily on refining and thus more exposed to changes in the industry. "As a result, we expect PBF's earnings upside to be limited due to below-average level refining margins as capacity adds globally keep utilization rates low," Mehta wrote. In addition, Mehta expects PBF's additional debt to cause its interest payments to rise and eat into free cash flow. The company did not immediately respond to a request for comment. |
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