Frontier Oil Corp. (FTO): Removing from Buy list on continued weak gasoline fundamentals - Goldman Sachs - June 09, 2008
What happened
We are removing shares of Frontier Oil from the Americas Buy List given further weakness in gasoline market fundamentals, as well what we believe to be a more favorable risk/reward in crude-oil levered integrated oils. Since being added to the Buy List on January 29, 2008, Frontier shares are -23.7% versus -5.8% for our coverage group, +12.3% for the XOI and -0.1% for the S&P 500. Over the last 12 months, Frontier shares are -31.0% versus -10.3% for the S&P 500. There is no change to our EPS estimates or $34, 12-month target price (based on asset value, P/E and cash flow valuation analyses; key risk is sustained lower refining margins).
Current view
Despite lowering our outlook on the refining sector last month, we had stuck with Buy ratings on both Frontier and Valero Energy based on our view that the combination of inexpensive valuations and exposure to light-heavy crude oil spreads and middle distillate production would mitigate weak gasoline margins. The key catalyst to shares outperforming, however, is a recovery in gasoline cracks heading into the summer driving season. Given further weakness in US gasoline demand and increasingly bullish crude oil fundamentals driven largely by unforeseen strength in non-OECD middle distillate demand, we believe the likelihood that gasoline cracks recover has meaningfully decreased. We continue to believe Frontier shares are inexpensive and offer compelling longer-term value though in an increasingly bullish environment for crude oil prices see the risk/reward in crude-oil levered names as more favorable. Our Buy-rated integrated oils include ConocoPhillips (also Conviction Buy-rated), Hess (also Conviction Buy-rated), Petrobras, Murphy Oil, Suncor Energy, and Chevron. Valero Energy is now our only Buy-rated refiner. |
