Refiners’ cash flow excess or shortfall
Although refining companies’ earnings have been recovering from the lows witnessed at the beginning of 2016, they are still volatile. In such a scenario, the level of cash flow from operations (or CFO) have also been unstable.
To be considered financially sound, a company’s CFO should adequately cover its vital capex (including acquisition and turnarounds costs) and expected dividend outflows.
In the chart above, we have analyzed refiners’ cash flows to calculate how the cash flow from operations could cover capex and dividend outflows for each company. Valero Energy’s (VLO) cash flow from operations in 2016 stood at $4.8 billion, and its outflows in terms of capex and dividends stood at $1.3 billion and $1.1 billion, respectively. The excess in cash flow stood at $2.4 billion, which puts VLO in a good cash flow position.
Refiners’ cash flow comparison
The cash flow situation varies across the sector. While some refiners are lagging with a cash flow shortfall, some are leading with a cash flow surplus. When these are measured as a percentage of CFO, it shows which company is better placed to handle periods of severe refining environments.
Valero’s (VSO) cash flow excess as a percentage of CFO stands at 50%. Comparatively, Marathon Petroleum’s (MPC) excess stands at 11%. This shows that VLO’s excess is significantly higher than MPC, placing VLO in a better position. Marathon Petroleum’s cash outflows in the form of capex are higher than VLO’s due to MPC’s expansion activities, which could lead to higher CFO.
On the other hand, Tesoro’s (TSO) cashflow shortfall stands at -19%, which is due to acquisition cash outflows in 2016. Tesoro announced that it has agreed to acquire Western Refining (WNR). For more on this acquisition, please read Western Refining Stock Rises 23% as Tesoro Moves to Acquire It.
Companies that have lower CFO due to capex or acquisition activities could see their CFO improve. If you’re looking for exposure to mid-cap stocks, you can consider the SPDR S&P Midcap 400 ETF (MDY) (MID-INDEX). This ETF has ~4% exposure to energy sector stocks, including WNR.
Phillips 66 (PSX) has a cash flow shortfall. PSX’s shortfall as a percentage of CFO stands at -39%, which is due to high capex and dividend outflows in comparison to CFO inflows. For more on this, please refer to Can Phillips 66 Create a Stable Earnings Model?
After performing our cash flow analysis of refining companies in 2016, we believe that Valero Energy (VLO), with its higher cash flow excess, is better placed to face the volatile refining environment.