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Refining Sector in 2Q17: TSO Outperforms MPC, VLO, and PSX

PART:
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Part 10
Refining Sector in 2Q17: TSO Outperforms MPC, VLO, and PSX PART 10 OF 12

Chart in Focus: The PEG Ratio for Refining Stocks

Refining stocks’ PEG ratios

Previously in this series, we looked at refining stocks’ short interest movements, which reflected a fall since April 2017. In this part, we’ll switch to valuation analysis beginning with the PEG (price-to-earnings to growth) ratio.

The PEG ratio examines a stock’s valuation after factoring in its expected future growth rate. We have taken into consideration integrated energy stocks’ mean estimates of PEG. 

The mean estimate is calculated by considering a stock’s mean price-to-earnings ratio and mean blended earnings growth rate. A PEG ratio that is less than 1 signifies an undervalued stock.

Chart in Focus: The PEG Ratio for Refining Stocks

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Tesoro (TSO) has the highest PEG ratio, standing at 0.73 and above the peer average of 0.65. The peer average considers the average PEG of the four American refining companies being discussed in this series. 

The PEG ratios of Marathon Petroleum (MPC), Valero Energy (VLO), and Philips 66 (PSX) stand below the peer average at 0.64, 0.58, and 0.63, respectively.

Refining stocks’ capex

The PEG ratio considers not only growth rates in earnings for the next two years but also the long-term growth rate. To shield themselves from a volatile refining environment, refining companies have been focusing on the midstream segment. Their strategies have included growth projects, which have a competitive advantage, and acquisitions, which fit into their overall growth objectives.

Marathon Petroleum 

If we consider their latest capital expenditures (or capex) in 1Q17, Marathon Petroleum (MPC) incurred ~$1.3 billion in capex. Of the total capex, $192 million belonged to its Refining and Marketing segment, $35 million went toward its Speedway segment, and ~$1.1 billion was applied to its Midstream segment. 

MPC had dropped down its midstream asset to its master limited partnership, MPLX (MPLX), with the goal of strengthening its Midstream segment. MPLX intends to spend $1.8 billion–$2.0 billion in organic capex and ~$150 million in maintenance capex for 2017. 

For more information on MPC’s capex and growth plans, please read The Current Focus of Marathon Petroleum’s Capex.

Phillips 66

In 1Q17, Phillips 66 (PSX) incurred $470 million in capex. The Freeport LPG export terminal, which commenced operations in 4Q16, is now completely operational. PSX’s project in petrochemicals in the US Gulf Coast is expected to commence in 2H17. 

Phillips 66 Beaumont Terminal storage capacity (of crude oil and products) could expand by another 1.2 million barrels in mid-2017. PSX is undertaking a series of modernization projects at its Bayway, Billings, and Wood River refineries, which are expected to start up in 1H18, June 2017, and 1H18, respectively. 

For more on PSX’s capex, please refer to How Phillips 66’s Capex Is Shaping Up Future Growth Trajectory.

Tesoro

In 1Q17, Tesoro’s (TSO) capex stood at $226 million, of which $45 million went toward Tesoro Logistics LP (TLLP). Tesoro aims to strengthen its midstream master limited partnership, TLLP, via organic (optimal capex) and inorganic (dropdowns and acquisitions) paths. 

In 2Q17, Tesoro completed the acquisition of Western Refining. This could bring significant benefits in terms of higher capacity and operational synergies. For more on this, you can refer to Tesoro Completes WNR Acquisition: A Post-1Q17 Update.

Valero

Valero’s capex for 1Q17 stood at $641 million. VLO expects its capex to reach ~$2.7 billion in 2017, of which $1.1 billion would be for growth projects and rest for sustenance projects. Valero also plans to focus on its midstream MLP, Valero Energy Partners (VLP), to derive optimum value from its integrated downstream supply chain.

In the next part of this series, we’ll also look at refining stocks’ forward valuation.

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