Energy Business

Jefferies Issues Top Refining and Marketing Stocks to Buy

Analysts at Jefferies on Monday initiated coverage on four independent oil refiners and their affiliated logistics master limited partnerships (MLPs). After a period of high crack spreads in the year following the collapse of crude prices in the latter half of 2014, refiners have fallen on some tough times as domestic inventories have swollen. Crack spreads have tightened and refiners may be forced to cut production runs.

Jefferies initiated coverage on the following firms, listed here with their rating, Monday closing price and price target:

  • Marathon Petroleum Corp. (NYSE: MPC): Buy; $41.10; $48
  • MPLX L.P. (NYSE: MPLX): Hold; $33.60; $35
  • Phillips 66 (NYSE: PSX): Hold; $76.97; $72
  • Phillips 66 Partners L.P. (NYSE: PSXP): Hold; $48.91; $54
  • Tesoro Corp. (NYSE: TSO): Buy; $74.42; $101
  • Tesoro Logistics L.P. (NYSE: TLLP): Hold; $46.11; $49
  • Valero Energy Corp. (NYSE: VLO): Buy; $54.43; $66
  • Valero Energy Partners L.P. (NYSE: VLP): Buy; $41.62; $53

In their general comments on refiners, Jefferies analysts see “potential for planned maintenance downtime and economic run cuts” to help draw down the swollen inventories. They also expect “ongoing investment in the midstream space in an effort to diversify exposure & promote stability in underlying cash flows.”

Concerning the MLPs, Jefferies expects to see cash-rich refiners move to make more acquisitions in the logistics space. Calling the MLPs a “multiple step up in valuation” due to “well articulated growth backlog, open capital market access, and volume agnostic contractual arrangements,” the “refining affiliated MLP model is now taking on a new life.”

We include here some of the analysts’ comments on each of the refiners and MLPs on which they are initiating coverage:

Marathon Petroleum

  • The largest refinery operator in PADD 2
  • Most levered to [General Partner Incentive Distribution Rights] relative to refining peers
  • Owns & operates one of most profitable C-stores in country
  • Strong vertical integration from refining to marketing
  • Has made several large midstream acquisitions in last year (MWE merger, 9% stake in [Dakota Access Pipeline])


  • The largest processor and fractionator in Marcellus & Utica thus direct volume exposure to natural gas & NGLs from northeast producers
  • Strong backlog of additional northeast dedicated midstream projects through 2017
  • Potential to acquire interest in Mariner East 2 with MPC support
  • Large inventory of drop-down assets from MPC

Phillips 66

  • Most diversified portfolio of assets
  • Best performer vs peer group YTD (-2% vs -25%)
  • High quality midstream infrastructure projects ([Dakota Access Pipeline], Freeport, etc)
  • Diversity yields internal hedge support (i.e. long ethane & ethylene)
  • Berkshire Hathaway owns 15% of outstanding shares
  • In late innings of world-scale ethylene cracker completion

Phillips 66 Partners

  • Large and highly attractive list of drop-down assets from [investment grade] parent
  • In-flight growth projects expected to contribute to EBITDA in 2017
  • Has raised ~$1B of equity in last 2 quarters
  • Mgmt targeting ~20-25% distribution growth in 2017 & 2018 as it targets a 30% CAGR since 4Q13 IPO
  • Strong downstream support for midstream projects via PSX

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