Refining companies’ earnings growth expectations
Wall Street analysts expect refining firms’ earnings to fall in 2019. Delek US Holdings (DK) and Valero Energy’s (VLO) earnings are estimated to fall less than 10% in 2019. However, the EPS of Marathon Petroleum (MPC), HollyFrontier (HFC), and Phillips 66 (PSX) are expected to fall 20%–40% this year. PBF Energy (PBF) could see the highest drop in its earnings in 2019.
The dull performance of these companies is likely due to weak refining conditions like lower oil spreads and generally higher turnaround activities. Most of the refiners are expected to enter planned maintenance and upgrading of refining units in the current year to prepare for new IMO (International Maritime Organization) regulations in 2020. From January 1, 2020, IMO will restrict sulfur content in marine fuel to 0.5%.
Investors usually look for financially strong companies with a high dividend yield, decent growth prospects, and reasonable valuations. Valero and Phillips 66 are financially sound companies with lower debts in their capital structure and favorable liquidity positions. However, these stocks trade at higher valuations, above the peer average forward PE of 8.5x. On dividend yields, all refining stocks trade above the average yield of 4.1% except for Delek and HollyFrontier.
Overall, Valero looks well-placed with the second-lowest earnings fall (of 10%), stronger financials, and higher dividend yields. Phillips 66 also has higher dividend yields and a healthy debt position.
However, Marathon Petroleum looks dull with 21% estimated fall in earnings and high debt on its balance sheet compared to peers. Delek, despite the lowest fall in earnings, looks dull due to its below-average dividend yield and weaker financials (higher debt and tighter operating cash flow).