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How MPC, VLO, HFC, and PSX Could Fare in Q2


Jul. 18 2019, Updated 1:20 p.m. ET

Let’s look at what analysts expect for refining companies Marathon Petroleum (MPC), HollyFrontier (HFC), Valero Energy (VLO), and Phillips 66 (PSX) in the second quarter. We’ll review their EPS expectations and ratings.

Whereas they forecast HollyFrontier’s EPS rising 4% YoY (year-over-year) in the second quarter, they expect Valero’s, Phillips 66’s, and Marathon Petroleum’s EPS to fall 12%, 14%, and 34%, respectively. They foresee HollyFrontier’s EPS rising due to better refining cracks and the company’s diversified earnings model, which incorporates lubricant and midstream earnings.

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Refining conditions

Analysts expect refining earnings to weaken YoY in Q2 2019, driven by narrower oil spreads and offset by wider refining cracks. In the second quarter, the US Gulf Coast WTI 3-2-1 crack widened by 9% YoY, whereas oil spreads contracted—the Canadian and Midland spreads narrowed by 30% and 71% YoY, respectively.

Marathon Petroleum’s refining margin indicators show a similar trend. While the company’s sweet and sour differentials narrowed by 20% and 74% YoY, its blended crack expanded by 17% YoY in Q2 2019. Valero’s refining cracks narrowed in its main operating regions, the US Gulf Coast and North Atlantic, by 14% and 9% YoY, respectively.

However, HollyFrontier’s Midcon, Rockies, and Southwest refining indexes expanded by 10%, 12%, and 4% YoY, respectively, which could boost HFC’s refining earnings. These weaker oil spreads could be offset by RIN (renewable identification number) prices weakening YoY in the second quarter, lowering compliance expenses for refiners.

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Analysts’ ratings

Marathon Petroleum, whose earnings are expected to fall the most, has the most “buy” ratings from analysts. They may be considering its growth activities and earnings outlook for the next couple of years rather than its prospects this year. Valero has the second-most “buy” ratings, possibly due to its financial strength, and Phillips 66 also has moslty positive ratings due to its integrated growth model.

Analysts seem divided on HollyFrontier due to its weaker 2019 earnings outlook, and have assigned it the least “buy” ratings. Let’s look at each company in detail, starting with HollyFrontier.

HollyFrontier’s EPS expected to rise, peers’ expected to fall

As we’ve discussed, HollyFrontier’s EPS are expected to rise YoY in the second quarter. In Q1 2019, the company’s revenue of $3.9 billion surpassed analysts’ mean estimate. Although its adjusted EPS of $0.54 exceeded analysts’ estimate of $0.43, they fell 30% YoY.

HollyFrontier’s net income attributable to shareholders dropped YoY from $268 million to $253 million in Q1 2019. Its adjusted EBITDA fell 11% YoY to $282 million due to lower refining, lubricant, and specialty product earnings offset by higher midstream earnings.

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HollyFrontier’s Q2 2019 estimates

In Q2 2019, analysts expect HollyFrontier’s EPS to rise 4% YoY and 180% sequentially to $1.51, and its revenue to fall 6% YoY to ~$4.3 billion. The company’s Midcon, Rockies, and Southwest refining index values have risen. Refining index values in the Midcon region, which accounted for 53% of the company’s total crude throughput in Q1 2019, rose YoY in Q2 2019 from $18.20 per barrel to $20.

In the first quarter, the Rockies and Southwest regions processed 20% and 27% of HollyFrontier’s throughput, respectively. Rockies index values rose YoY from $28.60 per barrel to $32.20, while Southwest values surged from $30.20 per barrel to $31.30.

However, the company’s base oil indexes all narrowed in Q2, suggesting lower rack back earnings for the company. Its Group II base oil crack contracted the most, by 55% YoY, and its Group I and Group III cracks narrowed by 51% and 7% YoY, respectively. Next, we’ll look at Valero.

How Valero did in the first quarter

In Q1 2019, Valero’s revenue exceeded analysts’ mean estimate by ~13%. Although its adjusted EPS of $0.34 surpassed analysts’ estimate of $0.23 by ~48%, they were 66% lower than its Q1 2018 adjusted EPS.

Valero’s adjusted net earnings fell YoY from $431 million to $141 million due to its refining, ethanol, and renewable diesel operating earnings falling. To learn more, read How Valero’s Segmental Earnings Trended in Q1.

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Valero’s EPS expected to fall less than peers’

In Q2 2019, analysts expect Valero to post adjusted EPS of $1.89, 12% lower than its Q2 2018 adjusted EPS but 455% higher than its Q1 2019 adjusted EPS. They expect its revenue to fall ~19% YoY to $25.3 billion. Cracks narrowed in two of the company’s operating regions in the second quarter. In the US Gulf Coast region, it narrowed the most, by $2.20 per barrel YoY to $13.90. The region refined 58% of the company’s crude throughput in Q1 2019. Similarly, in the North Atlantic, which accounted for 17% of Valero’s Q1 throughput, the crack narrowed by $1.20 per barrel YoY.

The narrowing of these cracks could impact the company’s second-quarter earnings, partly offset by its Midcon and US West Coast cracks expanding YoY by $1.30 and $3.90 per barrel. Valero, which has been bearing compliance costs for some time, could also benefit from RIN prices falling. The company has reported that ethanol RIN prices fell 46% YoY to an average of 16.6 cents per gallon in Q2 2019, and biodiesel RIN prices fell 30% YoY to 37.5 cents per gallon. Let’s move on to our third refiner, Phillips 66.

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PSX’s Q1 2019 performance

Phillips 66’s first-quarter revenue of $23.7 billion fell short of analysts’ estimate by ~4%, and its adjusted EPS fell 62% YoY to $0.40. However, they beat analysts’ estimate of $0.34. The company’s adjusted net earnings fell YoY from $0.6 billion to $0.3 billion due to its pre-tax refining, chemical, and marketing pre-tax earnings falling. They were offset by its midstream earnings rising. To learn more, read Phillips 66 Posts Weak First-Quarter Earnings.

Phillips 66’s earnings expected to fall 14% YoY in Q2

In Q2 2019, analysts expect Phillips 66 to post adjusted EPS of $2.42, making a 14% YoY fall but a 504% sequential increase. They foresee its revenue falling ~5% YoY to ~$28.3 billion.

Oil spreads narrowed during the second quarter, which could impact Phillips 66’s refining earnings. However, the benchmark US Gulf Coast WTI 3-2-1 crack expanded by 9% YoY to $20 per barrel. As the US Gulf Coast accounts for ~36% of Phillips 66’s crude oil throughput, its crack expansion could boost Phillips 66’s refining earnings in Q2 2019.

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The company’s steady chemical, midstream, and marketing earnings could also offset its weak refining earnings. In Q1 2019, these segments’ combined earnings fell YoY to $748 million from $788 million, but in Q2 2018, Q3 2018, and Q4 2018, these segments’ earnings stood at $816 million, $960 million, and $1,153 million, respectively. Next, we’ll review our last refiner, MPC.

MPC’s Q1 performance

Although Marathon Petroleum’s first-quarter revenue of $28.6 billion surpassed analysts’ estimate, its EPS missed their estimate. Whereas analysts had expected EPS of $0.05, MPC reported EPS of -$0.01, or -$0.09 adjusting for gains, tax adjustments, and transaction costs.

During the first quarter, MPC’s reported net earnings fell YoY from $37 million to -$7 million. To learn more, read MPC’s Refining Segment after Its Operating Loss in Q1.

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Wall Street expects MPC’s earnings to fall the most

As we’ve discussed, analysts expect Marathon Petroleum’s earnings to fall the most in Q2 2019. They forecast its EPS to fall YoY to $1.49 from $2.27, but rise sequentially from -$0.09. They expect its revenue to rise 49% YoY to $33.5 billion.

Marathon’s second-quarter earnings will include Andeavor’s asset integration, which expanded its refining capacities, midstream capabilities, and retail network. The company’s refining earnings are affected by its sweet, sour, and blended cracks. According to MPC, a dollar-per-barrel expansion in the blended crack boosts its annual net income by $900 million, and a dollar-per-barrel shift in the sour and sweet differentials alters its annual net income by $450 million and $370 million, respectively.

The company reports that the blended crack expanded YoY by $2.30 per barrel to $16.40 in Q2 2019, but its prompt sour differential narrowed YoY by $5.80 per barrel to $2.10, and its prompt sweet differential narrowed YoY by $0.60 per barrel. The company’s refineries processed 52% sour crude in the first quarter. As Marathon’s refining earnings indicators were mixed in Q2, with its blended crack expanding and sweet and sour differentials contracting, its refining earnings could fall. Let’s look at analysts’ views on the four refiners.

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Analysts’ views on HFC and VLO

Of the 17 and 19 analysts covering HollyFrontier and Valero, respectively, 18% and 84% recommend “buy.” Analysts mostly recommend “hold” for HollyFrontier, possibly due to its earnings outlook. Its oil spreads and growing lubricant segment’s oil cracks have been narrower this year and could impact its refining and rack back earnings.

Although analysts expect HFC’s earnings to fall 30% in 2019, their mean target price of $55 for the stock implies a 21% gain from its current price—the company’s strong financials could support expansion. HollyFrontier had comfortable debt and liquidity in Q1 2019.

Most analysts love Valero

The first quarter was difficult for refiners, with Valero’s refining earnings falling 41% YoY to $479 million, MPC posting an operating loss of $334 million, PSX posting a pre-tax adjusted refining loss of $219 million, and HFC’s adjusted refining EBITDA falling 4% to $193 million.

Despite these stricter business conditions, Valero’s net debt-to-EBITDA and total debt-to-capital ratios were 1.2x and 32% in the first quarter, respectively, both favorably below the industry average. The company also had adequate cash reserves in the quarter, suggesting financial strength and flexibility. Valero is targeting incremental annual EBITDA of $1.2 billion–$1.5 billion by 2022 from its growth projects.

Analysts may be mostly positive on Valero due to its sound financials and growth activities hinting at a brighter long-term outlook. Their mean target price of $104 for the stock implies a 28% gain from its current price.

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Analysts’ opinions on MPC and PSX

Of the 17 and 18 analysts covering Marathon Petroleum and Phillips 66, respectively, 94% and 72% recommend “buy.” They expect Marathon’s integrated model, high capacities, Andeavor acquisition, and refining and midstream capex activities to boost its earnings, projecting its EPS to rise by 72% in 2020. However, they expect its earnings to fall 24% this year, and its debt position is not comfortable.

Analysts’ mean target price of $79 for the stock implies a 45% gain from its current price—the highest anticipated gain among the four stocks we’re looking at. Their target prices for Phillips 66, HollyFrontier, and Valero Energy imply gains of 21%, 21%, and 28%, respectively.

Phillips 66 gets mostly “buy” ratings

Phillips 66’s diversified downstream business model shields it from market volatility, as its midstream, chemical, and marketing segments continue to contribute when refining earnings are weaker. The company plans to grow these segments through capex and acquisitions. It also has sound financials, with decent debt and liquidity.

Therefore, it’s no surprise that Phillips 66 is analysts’ favorite. Their mean target price for the stock is $116.


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