Stocks of independent oil refiners have had a pretty brutal week, but at least today they are seeing slight gains.
Valero Energy (VLO) is up 0.8%, while Marathon Petroleum (MPC) is up 1.1%. Shares of Tesoro (TSO) have risen 0.7% and HollyFrontier (HFC) have gained 0.6%. Phillips 66 (PSX) is down a fraction, itself a relief given the stock, along with its peers, lost more than 10% through Wednesday’s close (HollyFrontier lost the least, about 7%).
Sam Margolin at Cowen came out with a note about the refiners today, giving some context to their recent decline and striking a bullish tone about their prospects.
Since March 1st, our group of independent refining coverage is down over 13%, following a long stretch of outperformance through nearly every period over the prior 24 months, including a still leading 20% gain ytd even after the sell off. A confluence of negative indicators is behind the selling, including a $10/bbl contraction in the Brent/WTI differential, a correlated decline in front month NYMEX 3-2-1 crack spreads, inflation in RINs costs, and a proposed lower ceiling for gasoline sulfur content by the EPA.
Margolin notes that gasoline margins have fallen 35% since March 8, due largely to weaker demand. These dynamics may keep refiner stocks volatile in the near-term, Margolin says, but the medium-term the picture is rosier:
It is our overall thesis that the group of independent refiners hold the most advantaged assets in the market, and export growth in 2013 can keep the instry appropriately scaled for demand conditions. The principal drivers of refining stock performance over the past two years – accelerated return of cash, monetization of secondary assets, and feedstock cost advantages relative to competing global refineries – remain in place for the coming year. As such, we maintain our estimates and ratings, while we look for a gasoline price stabilization as the primary catalyst for re-entry.
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