Why MPC and PSX Trade at a Premium, ANDV and VLO at a Discount



Refiners’ valuations

In the previous part of this series, we discussed refining stocks’ dividend yield trends. 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 forward price-to-earnings (or PE) ratios for these refiners stand at 7.4x and 12.4x, respectively.

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MPC’s superior valuations

MPC trades at a 7.8x forward EV-to-EBITDA and a 13.5x forward price-to-earnings ratio, above the peer averages. This difference could be because of MPC’s growth activities and the completion of its strategic plan. The company plans to expand across segments. MPC expects to spend around $4 billion in 2018. The company plans to spend 60% of its estimated capex in the midstream segment, 24% in refining, and 13% in the Speedway segment in 2018. Also, MPC’s strategic plan, unveiled in January 2017, has now completed the drop-down of assets representing $1.4 billion in EBITDA to its MLP, MPLX (MPLX), strengthening the company’s midstream segment. See Marathon Petroleum’s Capital Expenditure and Growth Trajectory.

PSX trades at a premium

PSX trades at an 8.1x forward EV-to-EBITDA and 13.3x forward price-to-earnings, above the peer averages. Phillips 66 trades above its peer averages, likely due to its earnings model, which is growth-oriented and well diversified. PSX’s capital budget for 2018 stands at $2.3 billion, of which $1.4 billion goes toward growth activities. PSX focuses on improving steady income from its midstream and marketing segments along with growing returns from its refining segment.

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VLO’s discounted valuations

Valero Energy (VLO) trades in line with average forward PE but below average forward EV-to-EBITDA. VLO’s forward PE and forward EV-to-EBITDA stand at 12.4x and 6.7x, respectively.

VLO is progressing on its growth path with an aim to create an integrated downstream value chain. Plus, the company has a sturdy debt position and surplus cash flow in its system. However, Valero’s earnings are affected by RINs (renewable identification numbers) costs. VLO has incurred ~$942 million to purchase RINs in 2017—around 26% of its operating earnings. Similarly, in 2016, VLO incurred ~$750 million. VLO expects the cost to stand between $750 million and $850 million in 2018. So this cost is continuously denting earnings for the company.

ANDV’s lower valuations

ANDV trades at a 10.5x forward price-to-earnings and 7.1x EV-to EBITDA, both of which stand below the peer averages. This underperformance could be because ANDV’s net debt to EBITDA and total debt to total capital ratios stand higher than the industry average—not a comfortable situation. Also, in terms of discretionary cash flow, the company has seen a shortfall. See Is Andeavor’s Debt Position Improving?


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