Comparing Refiners’ Valuation: MPC, ANDV, VLO, and PSX


Oct. 12 2017, Updated 9:07 a.m. ET

Refiners’ valuation

In the previous part, we discussed refining stocks’ dividend expectations for 4Q17. In this part, we’ll look at Marathon Petroleum’s (MPC), Andeavor’s (ANDV), Valero Energy’s (VLO), and Phillips 66’s (PSX) forward valuation. Their average forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) and forward PE (price-to-earnings) multiples are 8.0x and 16.0x, respectively.

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MPC and PSX trading at a premium

Phillips 66 has a forward EV-to-EBITDA multiple of 9.2x and a forward PE multiple of 17.1x, above the peer average. Likewise, Marathon Petroleum has forward EV-to-EBITDA multiple of 8.2x and a forward PE multiple of 16.6x. Why are they higher than the peer average?

Phillips 66’s diversified earnings model shields it from refining volatility, and the company is focusing on increasing its steady midstream and marketing segment earnings. Marathon Petroleum is in the process of dropping down midstream assets to its MLP, as we’ve discussed.

ANDV’s valuation

ANDV has an EV-to EBITDA multiple of 7.8x and a forward PE multiple of 15.5x. A few months back, its multiples were higher than both peer averages. However, the recent decline in its stock price after the release of its 2Q17 results led to a drop in its valuation.

The market seemed to be expecting better refining earnings in the second quarter. However, the 91% decline in Andeavor’s refining operating income in 2Q17 may have taken a toll on its stock. As the Western Refining integration moves ahead and ANDV realizes its anticipated synergies, the situation might improve. Andeavor’s organic and inorganic growth activities are likely to boost its future earnings, supporting its stock price and valuation.

VLO’s discounted valuation

Valero Energy’s valuation ratios are lower than peers’ averages. VLO’s forward EV-to-EBITDA multiple is 6.6x, and its forward PE multiple is 14.8x. Whereas Valero has a stable financial position, RIN (renewable identification number) costs may dent its earnings. In 2Q17, VLO incurred $255 million towards the purchase of RINs, compared with $82 million in 2Q16. The figure stood at $749 million in 2016, representing 21% of its operating margin. The expense is expected to be $750 million–$850 million in 2017.


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