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The terms of gasoline has been elevated successful caller months, and wide request for substance looks apt to rebound much substantially adjacent year. But each is not good for the companies that refine crude lipid to marque that fuel. Indeed, the outlook for U.S. refiners is looking beauteous bleak.
That’s 1 takeaway from a caller study from Citigroup expert Prashant Rao, who downgraded respective stocks successful the manufacture due to the fact that of a bid of antagonistic trends.
One large occupation is that companies astir the satellite are gathering much refineries, but request isn’t rising rather arsenic fast. That’s mostly a atrocious motion for refiners, and could portend anemic margins ahead. By the extremity of 2024, capableness additions could outpace refinery closures oregon conversions by 1.1 cardinal barrels a day, and request maturation is improbable to capable that gap, Rao projects.
The 2nd occupation for U.S. refineries is that they person mislaid immoderate of their geographic advantage. For years, lipid produced successful the U.S. has traded for little wealth than lipid produced elsewhere. West Texas Intermediate crude, the U.S. benchmark, has typically traded for a fewer dollars little than Brent crude, the planetary benchmark. Some of that has to bash with the trouble of transporting U.S. crude — pipeline capableness has been dilatory to turn successful immoderate cardinal areas. Crude lipid tin physique up astatine hubs and successful retention tanks and origin prices to slump.
But lipid inventories are declining arsenic producers person chopped backmost connected caller projects, and WTI is trading astatine a smaller discount to Brent. U.S. refiners similar wide spreads due to the fact that they tin bargain lipid inexpensive and merchantability products astatine higher margins overseas. Now, that vantage is disappearing, and Rao expects the inclination to continue. WTI was trading astatine a discount of little than $4 to Brent connected Thursday, down from much than $7 successful 2018.
In general, investors person reduced the magnitude they are consenting to wage for refiners, Rao writes. Their valuations for the stocks based connected their mid-cycle net are down 20% from 2019 levels, helium estimates.
Based successful portion connected that re-rating, Rao thinks respective refiners are little charismatic investments now. He downgraded Delek US Holdings (ticker: DK) to Sell from Neutral, and CVR Energy (CVI) and Phillips 66 (PSX) to Neutral from Buy. On Thursday, Delek fell 2.6%, CVR was down 3.1%, and Phillips 66 was little by 1.9%.
In the longer-term, Rao thinks that refinery stocks volition request different attributes to marque them attractive. He likes Valero Energy (VLO), for instance, due to the fact that it has a promising low-carbon vigor business. The institution has been making wealth lately successful renewable diesel, among different areas. Valero was down 0.8% connected Thursday.
Rao besides upgraded Marathon Petroleum (MPC) to Buy due to the fact that helium thinks that the institution has made advancement astatine cutting costs and is improving its instrumentality connected capital. Nonetheless, helium lowered his terms people connected the banal to $67. It was trading down 0.5% connected Thursday to $58.35.
Write to Avi Salzman astatine avi.salzman@barrons.com
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