Refiners’ Valuations for MPC, ANDV, VLO, and PSX



Refiners’ valuations

In the previous part, we discussed refining stocks’ dividend expectations for 4Q17. Now, we will look at the forward valuations of refiners Marathon Petroleum (MPC), Andeavor (ANDV), Valero Energy (VLO), and Phillips 66 (PSX).

The average forward EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] and average forward price-to-earnings (or PE) of these refiners stand at 7.8x and 14.2x, respectively.

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PSX trades at a premium

PSX trades at a 9.1x forward EV-to-EBITDA multiple and a 15.5x forward price-to-earnings ratio, above the peer averages. Phillips 66 (PSX) has a diversified earnings model aimed at shielding itself from the refining environment volatility.

The company focuses on increasing its steady midstream and marketing segment earnings. So, PSX’s diversified earnings model is the likely reason for the stock to trade at a premium.

MPC shows mixed valuation

MPC is in the midst of the strategic plan including dropping down midstream assets to its MLP. MPC has already started executing the plan, with its likely completion in 1Q18, except for the Speedway separation.

Marathon Petroleum’s valuation stands at 7.6x forward EV-to-EBITDA, which is below the peer average, and a 14.2x forward price-to-earnings ratio, which is in line with the peer average.

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ANDV’s lower valuations

ANDV trades at a 12.8x forward price-to-earnings ratio and a 7.5x EV-to-EBITDA multiple, which stands below the peer average. A few months ago, it traded at a premium to both peer averages. However, the recent fall in its stock price after its 3Q17 results led to a dip in ANDV’s valuations.

Although ANDV posted a sturdy set of numbers in its latest results, they fell short of analysts’ consensus estimates. As the Western Refining integration moves forward and ANDV produces its anticipated synergies, this condition could improve.

Plus, Andeavor’s growth activities are likely to raise its future earnings. Perhaps this could lead to growth in Andeavor’s stock price and valuations.

VLO’s discounted valuations

Valero Energy (VLO) trades lower than the peer averages on both valuation ratios. VLO’s forward PE and forward EV-to-EBITDA multiples stand at 14.1x and 7.0x, respectively.

Valero (VLO) has satisfactory leverage and cash flow position but is bearing the burden of high compliance costs. The purchase of RINs (Renewable Identification Numbers) quarter-over-quarter is denting the company’s refining earnings.

In 3Q17, VLO incurred $230.0 million toward the purchase of RINs, which is ~$32.0 million higher than 3Q16. In 9M17, VLO’s RINs cost stood at $631.0 million, which is ~19.0% higher year-over-year. This cost stood at $749.0 million in 2016, representing 21.0% of its operating margin. So, a volatile and continuous RINs burden is the likely reason for VLO to trade lower than the peer averages.


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