Credit Suisse on US Independent Refiners
E. Westlake
1Q Wobbles Less Important Than Narrowing Crude Diffs; Take Some Profits; DOWNGRADING PBF to
NEUTRAL (from Outperform); Lowering TP for PBF
Bottom Line: March refining margins ended on a weaker note than expected. This weak finish, inclusion of RIN costs, and
greater than expected 1Q maintenance cuts our 2013 EPS. But more important are the narrowing domestic crude
differentials (WTI, WCS, Bakken, Midland). We believe this narrowing is symptomatic of the infrastructure build out that is
starting to alleviate Mid-Con crude bottlenecks. We lower 2013 EPS by 4% across the group. There is less change to
2014/15 - the 2013 narrowing just represents an earlier normalization than we had assumed. It appears
seasonal/unplanned downtime at HFC, TSO, WNR, PBF has been larger than expected. Maintenance could be a 1Q issue
across the group.
So where next? The group responded well to 4Q beats so yesterday's sell-off makes some sense. Despite a good outlook
for the Gulf, the group should also struggle against the headwinds of narrowing crude spreads in 2013 as infrastructure
finally arrives. Preferring "Gulf" coastal and/or stocks with catalysts has been our mantra - MPC, TSO still fit the bill.
Downgrade PBF to Neutral (From Outperform): PBF is one of the more levered to good or bad times. A faster normalization
of Mid-Con crude discounts reduces EBITDA by 24% in 2013, 9% in 2014. We lower our recommendation to Neutral and
TP to $37/sh (from $42/sh).
Longer Term Earnings Power Intact? Incorporating RIN costs, a $10/bbl WTI-Brent spread and weaker international
margins, mid-cycle FCF remains decent but our 2014 EPS are below consensus notably for the Mid-Con group.
Stick With Well Capitalized Players That Have More Than One Way to Win: With mpg standards rising, biofuel mandates,
natural gas vehicles representing demand threats, we believe the well capitalized players, particularly with Gulf Coast
refineries that can benefit from rising Texas/Gulf crude production and export excess product, which also have logistic
options (and chemicals i.e. at PSX) should outperform. Despite a weak 1Q for TSO, the potential closure of Carson and
strong free cash generation suggests sticking with the shares. MPC should benefit from DHOUP and TX City, PSX from
further consensus earnings power upgrades.
Please refer to our full report for material changes to our stocks.
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