US Independent Refiners
Despite Near Term WTI Headwinds, Best Still to Come for Gulf Refiners
10 July 2013 doc.research-and-analytics.csfb.com
Bottom Line: A compressing WTI-Brent spread and temporary surge in
global capacity additions in 2H13 is driving a continued sell-off in the group.
We cut near term EPS further and remain below consensus for '13. However,
we are above consensus in '14 for the Gulf Coast names (MPC, PSX) and
for TSO (Mid-Con names still have further EPS risk). Indeed we can see
higher EBITDA than '12 (a perceived peak) for these names – the best is yet
to come. Perhaps even more powerful is the theme of logistic monetization
over time, particularly at MPC, PSX and TSO. New pipes bringing crude
down to the Gulf in 4Q13 and 1H14 suggest time is running out to initiate
long positions in Gulf refiners. Although we are already below 2Q consensus
following our April cuts, we make further cuts leaving us 12% below 2Q13
EBITDA consensus, 11% below 3Q13. We cut TPs for ALJ, ALDW and PBF.
(See Material Changes table on page 18.)
Bull-bear valuation case: Our base case valuation embeds a 22% decline
in international margins vs 2012, which benefited from outages, and a WTI-
Brent medium term of $9/bbl in our valuation year (2016). Our bear case
embeds a 37% decline in margins and a WTI-Brent of $5/bbl (which could be
possible in a crude export scenario but feels narrow even then). In all cases,
our preferred names offer value upside. Logistics is a key support.
WTI-Brent Following the Script: In September 2011 Avoiding a WTI
Blowout Needs More Rail we argued 4Q12 would be the peak of WTI-Brent.
This January, we argued in the Great LLS Debate that WTI-Brent would
narrow as early as April and potentially undershoot to the downside. WTI-
Brent is following an expected script, and could remain narrow until the Gulf
Coast is overwhelmed. We forecast an incremental 800 KBD of incremental
barrels hitting the Houston market in 2014. As light crude and heavy
Canadian crude make their way, first to Texas, and then over time to
Louisiana (via Ho-Ho, Trunkline), Gulf Coast profits should improve. As Gulf
flows increase, the breakeven cost to absorb these flows should support
WTI-Brent expanding into the $8-10/bbl range. Even under an export
scenario, logistics costs still suggest a WTI-Brent of around $7/bbl.
We Favor Gulf Coast and Logistics: This year we have favored coastal
names with large logistics businesses to monetize and with catalysts (e.g.
MPC). For adventurous money, we would revisit WNR given valuation and
the MLP potential. HFC is becoming more interesting for those willing to wait
until 2015/16 when black wax projects are completed, but still feels early. |
