Why Credit Suisse Remains So Positive on Refiners

Print Email


It has become very difficult to find many investors and analysts who are willing to stick out their necks in the oil and gas sector. Many new investors, and a growing number of established investment funds and investment vehicles, have been turning their backs on from investing any funds at all into fossil fuel companies. It has become a situation wherein companies are viewed as “dirt cheap” but also there is no reason they cannot become even cheaper.

Within the infrastructure plays in oil and gas, one area that is still viewed positively by some analysts and investors is the refining stocks. The companies are likely to be busy for decades ahead, and other chemicals and the like have no workable alternatives other than from oil and gas.

Credit Suisse has issued a macroeconomic upside call to see expected upside in the refining segment. Credit Suisse’s Manav Gupta sees refiners as underappreciated in stock valuations, and the analyst sees one of the strongest starts to the fourth that has been seen in the past five years.

According to the call, U.S. distillate inventory is 11.3% below the five-year average and current Gulf Coast diesel crack is up 27% from last year (and up 45% above the five-year average and 36% above 2017 levels). The Brent-Maya spread, which averaged approximately $4.02 per barrel at the end of 2018, was about $5.33 per barrel in the third quarter of 2019, and it has now widened to $10.20 per barrel.

Gupta did note that offsetting a number of positives are lower in-land diffs, but there is still near-term upward revisions that should be a positive catalyst for the companies.

Valero Energy Corp. (NYSE: VLO) was shown to have posted $2.12 in EPS in the fourth quarter of 2018, and despite a number of indicators up so far in 2019, the current street estimates for the fourth quarter of 2019 are only at $1.40 per share. Credit Suisse is 40% above consensus on Valero, and it has a $100 price target (versus a $91.06 prior close).

Other Outperform ratings were shown as follows:

  • Delek US Holdings (NYSE: DK) with a $40 target price, versus a $37.37 prior close.
  • Marathon Petroleum Corp. (NYSE: MPC) with a $75 target price, versus a $65.14 prior close.
  • PBF Energy Inc. (NYSE: PBF) with a $40 target price, versus a $29.28 prior close.
  • Suncor Energy Inc. (NYSE: SU), shown in Canadian dollars, with an implied 31% upside.


I'm interested in the Newsletter