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Valuations of Refining Stocks: A Peer Comparison



Refining stocks’ market caps

In this series, we have discussed crude oil price trends, refined product price trends, and likely refining margin outlooks. We have also looked at the stock performance and analyst ratings of refining stocks. In this part, we will consider refining stocks’ forward valuations.

Before we proceed with peer comparison, let us consider the market capitalizations (or market caps) of American refiners. Phillips 66’s (PSX) market cap stands at ~$41 billion. This is higher than its peers Valero Energy (VLO) and Marathon Petroleum (MPC), which have market caps of ~$24 billion and ~$18 billion, respectively. Tesoro (TSO) has a lower market cap of ~$9 billion.

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Refining stocks’ valuations

Phillips 66 (PSX) is currently trading at a two-year forward PE (price-to-earnings ratio) of 11.4x, above its peer average of 8.4x. Western Refining (WNR), Northern Tier Energy (NTI), and Tesoro (TSO) are also trading above the average forward PE at 8.6x, 8.6x, and 9.9x, respectively.

Moving onto EV-to-EBITDA, MPC, TSO, NTI, and PSX are currently trading above the two-year forward EV-to-EBITDA peer average of 5.4x. Other refining sector stocks continue to trade below the peer average.

The valuations reveal that in larger peers, in terms of PE as well as EV-to-EBITDA, TSO and PSX are both trading above their peer averages. On the other hand, MPC and VLO are trading below their averages. For exposure to TSO, VLO, PSX, and MPC, you can consider the iShares US Energy ETF (IYE). The ETF has ~7% exposure to refining sector stocks.

Usually, everything else being equal, stocks trading lower than the peer average suggest likely undervaluation and an attractive entry point for investors. On the contrary, stocks trading above the peer average suggest likely overvaluation.

However, this needs to be further examined in conjunction with other financial parameters like balance sheet strength, future growth prospects, cash flow flexibility, and market positioning.


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