Refining stocks Delek US Holdings (DK), HollyFrontier (HFC), and PBF Energy (PBF) have been showing mixed performances. So far this month, Delek and HollyFrontier stocks have fallen 3.7% and 2.7%, respectively. In contrast, PBF stock has risen 2.3%.
Refining stocks’ upside potential
Analysts seem to have diverse views on these refining stocks. So, we’ll estimate the upside potential in these stocks based on the mean target prices.
Analysts are positive on PBF
Most analysts are positive on PBF Energy stock. Among the 16 analysts that cover PBF, nine (or 56%) recommend a “buy,” while six recommend a “hold.” Analysts’ mean target price on PBF stock is $39, which implies an 18% upside potential. The target price is higher compared to Delek and HollyFrontier.
The upside potentials in Delek and HollyFrontier stocks are 12% and 11%, respectively. Most analysts have a “hold” opinion on both of these refining stocks. While nine of 15 analysts rate Delek as “hold,” ten of 17 analysts rate HollyFrontier as a “hold.”
Why are analysts enthusiastic about PBF?
Most analysts are positive on PBF Energy due to its prospects post-IMO 2020. IMO regulations regarding the restriction of sulfur in fuels will come into effect in January 2020. So, refiners who can produce low-sulfur fuel will benefit from the increased demand. Also, if refiners use heavy or medium oil as feedstock, they will witness a boost in their margins.
PBF seems well-positioned to take advantage of IMO 2020. The refiner has coking capacities in place, which will help it boost margins in IMO market conditions. Recently, PBF acquired the Martinez refinery from Shell. The acquisition expanded the company’s refining capacity and solidified its position in the low-sulfur scenario. The Martinez refinery is a high complexity refinery with a dual-coking setup.
In the third-quarter earnings conference call, PBF CEO Tom Nimbley said, “While continuing volatility can be expected, the fact is that sweet-sour will have to widen to accommodate the penalty for making sour fuel. Sulfur is the enemy. Simply stated, complexity matters and refiners with deep converging capabilities like PBF will be at an advantage to refiners with less complex pits.”
Analysts have built-in expectations of a better refining margin and earnings in the company’s forecast for 2020. Notably, analysts expect the company’s profits to increase 380% YoY to $4.8 in 2020.
PBF’s latest earnings
PBF Energy’s third-quarter earnings were a positive surprise for analysts. The company’s adjusted EPS at $0.66 beat analysts’ estimates in the quarter. However, the company’s operating profits fell from $286 million in the third quarter of 2018 to $152 million in the third quarter.
A decline in PBF’s refining and logistics earnings led to a slump in its operating profits. The company’s refining earnings fell due to a fall in its margin and throughputs. PBF’s gross refining margin fell from $9.3 per barrel in the third quarter of 2018 to $8.9 per barrel in the third quarter.
Why are analysts divided on HollyFrontier?
Analysts are divided on HollyFrontier stock. The company has been modernizing its refining segment. Plus, HollyFrontier has been rapidly expanding its petrochemical segment. However, both of these industries face challenging business conditions.
In the refining segment, narrowing oil spreads have been hammering the company’s earnings. The Midland-Cushing spread and the WTI-WCS spread have been falling. In the fourth quarter, while the WTI-WCS spread fell 54% YoY, the Midland-Cushing spread turned negative.
Also, in the lubricant segment, Rackback margins have stayed weak throughout the current year. The weakness could continue in the next year as well. As a result, analysts expect HollyFrontier’s earnings to grow 4% in 2020.
HollyFrontier’s estimated earnings growth is lower than the growth expected in leading refiners like Valero Energy (VLO), Marathon Petroleum (MPC), and Phillips 66 (PSX). Analysts expect Marathon Petroleum, Valero Energy, and Phillips 66’s earnings to rise 68%, 93%, and 19% YoY, respectively, in 2020. Read Are Valero, Marathon, and Phillips 66 Beating SPY? to learn more.
Most analysts have “hold” opinion on Delek
Delek turned around its financial position last year. The company started making profits in the second quarter of 2018. Also, Delek beat the earnings estimate in its latest quarter. The company’s adjusted EPS of $0.78 beat the estimate of $0.68 in the third quarter.
Delek aims to reduce its dependence on volatile refining earnings. The company aims to raise the share of the midstream segment in its adjusted EBITDA from 22% in the third quarter to 35% in 2022–2023. As a result, the company is investing in midstream projects.
Delek expects $370 million–$395 million of annual EBITDA from the midstream segment on completion of projects by 2023. The projects include the Red River joint venture, Krotz Spring midstream assets, Big Spring Gathering System, and Wink to Webster Long Haul.
However, analysts don’t expect any respite for the company in 2020. Lower oil spreads will likely impact the company’s refining earnings. Analysts expect the company’s profits to fall 6% next year.
Analysts are positive on PBF stock due to its earnings prospects in the post-IMO market. As a result, analysts expect PBF stock to have the highest upside potential of 18%. However, Delek and HollyFrontier seem to have a dull earnings outlook for the next year. Narrowing oil spreads might impact these companies’ refining earnings.