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Which Refining Stocks Could Post More Gains?


May. 22 2019, Published 11:09 a.m. ET

Refining stocks’ implied gains

In this series, we’ll rank refining stocks based on their implied gains. We’ll consider analysts’ mean target price to estimate a stock’s implied gains. We’ll discuss refiners’ expected earnings growth in 2019, forward PE ratios, and dividend yields.

If we rank refiners based on the implied gains, then Marathon Petroleum (MPC) occupies the top slot. Marathon Petroleum is followed by Phillips 66 (PSX) and PBF Energy (PBF). These top three stocks have implied gains above 30%.

HollyFrontier (HFC), Valero Energy (VLO), and Delek US Holdings (DK) have implied gains between 20% and 30%.

The high implied gains in refining stocks are due to the sharp fall in their stock prices in the past year. Refining stocks have likely fallen, especially in the past few quarters, due to weaker refining conditions.

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Earnings growth, valuation, and dividend yields

Refiners are expected to post lower earnings in 2019. The fall was led by the expectation of relatively lower cracks and spreads this year. PBF Energy is expected to post the highest drop in profits. Phillips 66 and HollyFrontier also have high earnings decline rates. These three companies’ earnings are expected to fall more than 30% in 2019.

Marathon Petroleum, HollyFrontier, and Delek US Holdings trade below the average forward PE ratio of 9.3x. However, other stocks trade above the average.

On dividend yields, Marathon Petroleum, Phillips 66, PBF Energy, and Valero Energy stand above the peer average of 3.8%.

Marathon Petroleum seems well placed with the highest implied gains, below average valuation, and above average dividend yield. The stock also has a lower earnings decline rate for 2019. Valero Energy looks good with a higher dividend yield and lower earnings decline rate.

HollyFrontier has low implied gains, a high earnings decline rate, and a below-average dividend yield.


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