Citi feeling more bullish about U.S. refiners, picks sector favorites

Citigroup analyst Faisal Khan says he is moving toward a more bullish view of the U.S. refining sector after a bout of selling amid low expectations.

Khan points to continued growth in U.S. and Canadian oil production, "sticky" oil prices due to Middle East volatility, U.S. oil price differentials that are "somewhat contained" at $5-$10/bbl, and headway on refining closures in the Atlantic basin that is only a matter of time.

As a result, the Citi team upgrades Marathon Petroleum (MPC +2.2%) to Buy from Neutral, as well as HollyFrontier (HFC +2%) to Neutral from Sell on valuation, but downgrades Alon USA Partners (ALDW -0.8%) to Neutral on the belief that Midland-Cushing differentials have peaked.

Valero Energy (VLO +1.7%) and Western Refining (WNR +2%) remain the firm's favorites - VLO because it sees “crude-on-crude competition on the U.S. Gulf Coast resulting in greater feedstock discounts at Valero’s high conversion refineries," and WNR for its restructuring potential.

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Comments (5)
  • db313706
    , contributor
    Comments (223) | Send Message
    So sheer scales of economy combined with oversaturation of raw materials is going to allow VLO to create its own favorable pseudo crack spread?


    I'm in. Long VLO.
    11 Jul 2014, 03:57 PM Reply Like
  • mapodga
    , contributor
    Comments (7295) | Send Message
    pseudo crack spread ?


    what could this mean?


    Maybe you mean that entire world has to have same crack spread, which mean difference "between input and output prices in refineries" don't exist. It is not so simple. Never been and never be. Only ex USSR tryed to achieve this.


    World is complex and business either. In oil business this means that every refinery and region has its own supply spread structure that define its profitability. It depends of its locations and technical capabilities. But not only this.


    For example: If you have Refineries that is enabled to produce gasoline from heavy crude like majority of VLO is, then changes of crack spread between Brent/LLS/WTI can't realy harm you.
    And if you are adopted to the production from: Canada, Venezuela, Mexico, ... heavy oil then difference in prices between Brent and WTI or other light oil can't harm you very much. USrefineries invested very much to be able to produe on base of hevy oil, so changes in prices of light oil can't change their economy.


    Anyway, check yourself and make your own opinion about real crack spreads on base of which VLO (and probably other US refineries) profit is done from their presentation SEC.


    pages between 34-37



    I'm also long on VLO.


    It is actually my primary stock. It is really good. Just take a look to their plan to produce gasoline from gas. This is entire new dimnesion.


    On base of cheap US gas, they can priduce really competitive gasoline.They can sell it in very short time. You don't need all this complex and extremlly expensive liquidaion faciulities to produce NLG and eport surpluses of US gas.
    11 Jul 2014, 05:43 PM Reply Like
  • Ripshot44
    , contributor
    Comments (13) | Send Message
    This is becoming comical. The amount of upgrades and downgrades for the entire sector changes faster than a Kardashian husband.
    13 Jul 2014, 01:18 PM Reply Like
  • arthur_bishop1972
    , contributor
    Comments (4292) | Send Message
    With the AH NR from VLO, I'd wait a bit on buying it.
    15 Jul 2014, 01:17 AM Reply Like
  • 244
    , contributor
    Comments (849) | Send Message
    VLO looks like it will be hurting today. Its down in the pre-market. So much for Citi's analyst research. They downgraded ALDW too. True their Q2 will be bad but their throughput after the turnaround has gone from under 40,000bpd to over 70,000bpd for Q3. Very sloppy work in Citi's part. Do these guys do any real work?
    15 Jul 2014, 08:55 AM Reply Like
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