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



Refiners’ valuations

In the previous part of this series, we discussed refining stocks’ dividend expectations for 2Q18. Now, we’ll look at the forward valuations for 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) for these refiners stand at 7.4x and 12.0x, respectively.

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PSX trades at a premium

PSX trades at 8.6x its forward EV-to-EBITDA and 13.4x its forward price-to-earnings, above the peer averages. Phillips 66 (PSX) has a diversified earnings model, aimed at shielding itself from refining environment volatility. Plus, 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 trading at a premium.

MPC shows mixed valuation

MPC’s strategic plan, which included dropping down midstream assets to its master limited partnership, is expected to unlock potential value for shareholders. The plan is about to complete the last step of the IDR exchange accomplished in 1Q18. Marathon Petroleum’s valuation stands at 7.6x its forward EV-to-EBITDA and 12.7x its forward price-to-earnings, above the peer average.

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ANDV’s lower valuations

ANDV trades at 9.6x its forward price-to-earnings and 6.8x its EV-to-EBITDA, which is below the peer average. A few months back, it traded at a premium to both peer averages. However, the fall in its stock price in 1Q18 led to a dip in ANDV’s valuations.

Nonetheless, as the Western Refining integration moves forward and ANDV produces its anticipated synergies, the condition might improve. Plus, Andeavor’s growth activities are likely to raise its future earnings, which could soon lead to growth in Andeavor’s stock price and valuations.

VLO’s discounted valuations

Valero Energy (VLO) trades above its forward PE but below its forward EV-to-EBITDA. VLO’s forward PE and forward EV-to-EBITDA stand at 12.3x and 6.7x, respectively.

Valero (VLO) has a 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.

VLO has incurred ~$942 million to purchase RINs in 2017. Similarly, in 2016, VLO incurred ~$750 million, around 21% of its operating margin. VLO expects the cost to stand between $750 million and $850 million in 2018. So this cost is continuously denting earnings. VLO trades below the forward EV-to-EBITDA peer average, presumably due to the RINs acquisition burden. Plus, RINs prices can be very volatile.


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