Yesterday, refiners like Phillips 66 (PSX) and Holly Frontier (HFC) got hammered after the so-called spread between US and European oil benchmarks narrowed to the tightest level since last October. What should investors do now?
Bloomberg News Phillips 66 fell 2.6% yesterday, while Holly Frontier dropped 3.1%, Tesoro (TSO) declined 1.4%, Western Refining (WNR) plunged 4.3% and Delek US (DK) finished off 5.2%.
Credit Suisse analyst Edward Westlake and team explain aren’t feeling optimistic about the refiners:
We believe the local peak of Gulf Coast earnings seems behind us. Yes, there could be some widening in LLS in March/April given the transfer of inventory from Cushing to the Gulf, but as East of Rockies refineries ramp up for peak gasoline demand, summer crude spreads should remain tight. High crude prices will depress the margins on secondary products and retail. That is not to say earnings will disappoint hugely. Distillate has been helped by the cold winter, Maya remains wide, Mid-Cush has been wide. Its more that upside risks to earnings have diminished.
Westlake offered some thoughts on individual stocks, as well. Western Refining, which had its target price raised to $48 from $46, and Phillips 66 should benefit from other businesses–Western Refining, for one, has large logistic and chemical operations–while Tesoro could benefit from being recognized as a “Gulf Coast Refiner.” Westlake also raised his price target on Holly Frontier to $57 from $54. Delek US, however, needs to show signs of earnings improvement before its worth buying, Westlake notes.
Shares of Western Refining, which released earnings yesterday, have dropped 2.9% to $36.39, while Phillips 66 has ticked up 0.2% to $74.91, Tesoro has gained 1% to $51.24, Holly Frontier has fallen 0.4% to $45.43 and Delek US has fallen 4.3% to $27.59.
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