Independent Refiners
2013/2014 Consensus Still Too High
24 July 2013, 23 pages doc.research-and-analytics.csfb.com
Bottom Line: In January’s Great LLS Debate we felt refiner profitability
would decline in 2013 due to narrowing WTI-Brent and that it would take
some time for stress in Gulf coastal crude markets to widen WTI-Brent back
out. In early April we said “Take Some Profits, Downgrading PBF”. To avoid
WTI-Brent we’ve been hiding out in coastal names with catalysts (e.g. MPC)
and arguing logistic value would provide some support. After a VLO call,
where management continued to position RINs as a large 2014 hurdle and
seemed less optimistic about Gulf Coast crude discounts until 2015, we cut
our EBITDA estimates to more closely reflect this reality. EBITDA falls 9%
for 2013, 21% for 2014. Investors are likely already using lower EPS than
the sell-side. Being 20% below 1Q consensus back in April, 20% below Q2
consensus back in March and, after today’s cuts, 20% below 3Q EBITDA
consensus holds no prizes. RINs add another level of significant uncertainty
for certain names unless legislation changes. There is value in select names
(MPC, PSX, DK, WNR) but a need for some valuation or EPS caution in
others (PBF, ALJ, VLO, the variable rate refiner MLPs) given limited
valuation support and RINs risk (until legislation changes). We downgrade
both ALDW and NTI to Neutral from Outperform.
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RINs
Robin Hood, Robin Hood Riding Through the Glen
22 July 2013, 13 pages
Download link at the bottom of sendspace.com
Bottom Line: With RINs again front and center of investor concerns, we
reprise our thoughts from Tulip Mania. In the legend, Robin Hood stole from
the rich and gave to the poor. In our view the badly designed RFS legislation
creates a windfall for blenders (which have little capital intensity), while
taking money from the Independent Refiners that need to spend significant
dollars keeping just over 50% of the US refining system in operation to meet
longer-term demand from US consumers. RINs distort the market which
could lead to higher prices at the pump for US consumers, hitting the low
income consumer disproportionately due to food price inflation (natural gas
is better than corn to drive with). What’s particularly vexing is that there are
simple fixes – limit the ethanol blending to the 10% blend wall until the auto
industry catches up (agri states should still be happy with corn ethanol
production at 13.3bn gals per yr, i.e., around current levels) and match the
cellulosic requirement with the progress of technology to produce this non-
food sourced material.
2014 is the Real Fear: With the RIN price on the screen now $1.43/gal and
a structural short existing for ethanol RINs in cal 2014, investors are nervous
and we carry significant costs in our forward EBITDA forecasts for the group.
Aside from legislative fixes, solutions include (1) build more flex fuel vehicles
and flex fueling stations (too slow), (2) export more product (helps at margin
only), (3) acquire more blending capacity, (4) blend more biodiesel. Aha! As
we’ve discussed in the past, a biodiesel RIN excess can be applied against
ethanol RIN shortfalls. Until recently this did not matter but without a
legislative fix, as RIN prices rise, more refiners may be tempted to tap the
15bn gal soybean oil and try to limit their liability.
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