Credit Suisse on US Independent Refiners and Valero
US Independent Refiners
Cutting Near Term EPS But Drawing a Line in the Sand
03 May 2013, 30 pages, doc.research-and-analytics.csfb.com
Bottom Line: The US Refiners have a large competitive moat from cheap
crude, cheap natural gas, the ability to process cheap heavy crude and their
economies of scale. As we flagged in the Great LLS Debate, we felt there
was a risk WTI-Brent spreads could compress as early as April 2013. This
indeed occurred and we cut our 2013 EPS today (2Q by 19%, 3Q by 22%)
to reflect this early transition from “supernormal” to “normal” earnings. We
stress our mid-cycle earnings power is unaffected and mid-cycle target
valuations are 40-50% above current share prices. Global macro indicators
look too weak for the group to rally hard – but we’d like to draw a line in the
sand after a c15% correction from recent highs. Several themes stand out:
MPC, VLO and TSO Could Still Grow Earnings vs a “Supernormal
2012” Despite Narrower WTI-Brent. Self-help and for MPC/VLO a
reduction in Gulf coast crude input costs suggest the best may still be ahead.
Market Still Not Appreciating Logistics Value: While it will take time to
monetize logistics in the MLP market place, there is substantial logistics
value in the refining peers. Indeed, we see logistics value as a key driver of
absolute upside and relative stock selection (see inside, and Jumping on the
MLP Bandwagon). Lots of Firepower to Defend Share Prices: All but
three refiners are net cash today and the average free cash yield is c11% on
mid-cycle earnings. Managements have substantial firepower to defend
against share price weakness.
TSO and MPC preferred: We find most value in MPC (logistics, Galveston
Bay, Mid-Con earnings power) and in TSO (Carson City, Mid-Con earnings
power, operational turnarounds).
We reinstate on VLO with Neutral Rating: In a separate report out today,
we reinstate on VLO. We believe VLO can grow earnings but that MPC and
TSO offer more value.
Downgrade ALJ to Underperform: Although ALJ shares have absolute
upside, there is less upside than peers. In line with Credit Suisse balanced
recommendations, we lower to Underperform.
Upgrade WNR to Outperform: WNR has had a strong turnaround
performance over the past 2 years. Upcoming catalysts that could drive the
share price higher include 1) expanding the El Paso refinery 2) launching a
Logistics MLP and 3) raising shareholder distributions.
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Valero Energy Corporation (VLO)
Important Year but Less Upside than Peers
03 May 2013. 42 pages doc.research-and-analytics.csfb.com
Bottom Line: We reinstate coverage of VLO with a $45 target price but a
Neutral rating. We believe that 2013 will be important for VLO owing to a
surge in crude moving down to the Gulf and to the contribution of VLO’s
hydrocrackers (around $1bn-plus of EBITDA). Widening Gulf crude
discounts and hydrocracker EBITDA in 2H13 provide offsets to the
headwinds of narrower WTI-Brent spreads, lower expected international
margins, the dreaded RINs and somewhat narrower near-term heavy crude
differentials. VLO has decent upside at current levels, but less than our
preferred picks. |
