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PBF Energy: Time May Be Running Out

Apr. 06, 2023 7:58 AM ETPBF Energy Inc. (PBF)PSX68 Comments
Ronald Ferrie profile picture
Ronald Ferrie


  • PBF Energy enjoyed a spectacular 2022 and 2023 as crack spreads have remained high, leading to terrific operating margins.
  • PBF relies solely on its refineries for income. If crack spreads were to drop in the future, as predicted by the EIA, the good times will come to an end.
  • Purchasing units when crack rates are high exposes investors to capital losses when rates decrease. With a lack of meaningful cash returns to investors, this could be significant.
  • Larger competitors like Phillips 66, Valero, or Marathon provide a better risk vs. reward in the refinery space.

PBF Energy Refinery Close-up



PBF Energy (NYSE:PBF) has had a fantastic 2022 and so far, crack spreads in 2023 look to continue that trend. The EIA, however, forecasts the crack spread to return to normal at some point in 2024. I believe making an entry

This article was written by

Ronald Ferrie profile picture
I am a Licensed Professional Engineer who works in the Nuclear Power industry. I use my professional working knowledge of the power/energy industries to aid in evaluating potential equities worthy of long-term investment. I invest in income producing equities and rental real estate properties for cash flow and long-term appreciation. My articles are to serve as a platform for presenting the underlying fundamentals and long-term potential of each equity/business.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (68)

Clairvoyant Investor profile picture
Bought 500 shares worth at $31.69 a share after the solid earnings report. I patiently waited for confirmation on earnings before buying with leverage. Quant traders are buying this with size. Earnings were very impressive from all angles. Analysts are raising their price targets on refiners and the summer driving season has only begun. I love the risk/reward here at $31; $PBF is down 22% Year to date so probabilities are in your favor for solid upside with earnings confirmation now. This is by far the most oversold equity in the ENTIRE oil sector and it is not even close. Short sellers have overplayed their hand here in an overdone manner. $40 plus before the end of May
Danglinert profile picture
@Clairvoyant Investor completely agree with the buy. Great quarter. Just be careful with leverage as it looks like the months to come will be incredibly volatile. Must have staying power. Good luck1
@Clairvoyant Investor you don’t have enough equity to let your forecast be heard.

If one wants to benchmark with the poor then yes this is the hidden gem.
SO far 1Q refinery reports have been excellent with cracks much higher year on year, the stocks are suffering from technical weakness and allocations out of energy this year
Good job, Bubba. I think PBF has gone up every day since you recommendation. Bait and switch? Head fake?
Danglinert profile picture
@LEE64 probably just the company buying back stock. He will be proved right or wrong based on how the company itself does. I disagree with him, but the last week does not show who is right.
Ronald Ferrie profile picture
@LEE64 Thank you for the comment.
Not that it matters as Danglinert has pointed out, but PBF is actually slightly lower than when my article was published. $42.06 on opening price on 4/6. It closed today at $41.79.

Beyond that, all refiners stock prices have behaved in almost an identical pattern to PBF (Valero, Phillips 66 and Marathon). So again, nothing special here. Which in general, is my theme about PBF in this space.

If you reread the summary, I do state the following:

"PBF Energy is benefitting from the under investment in the refinery industry. This under investment is creating an imbalance in supply and demand, leading to high crack spreads. I believe this has the potential to last for the next 12 to 18 months...

Investors who have benefitted from the rise in share price over the last year should begin to consider an exit strategy before profits become challenged."

The main point of the article was to communicate:
1. I feel investors would be better served with Phillips, Valero or Marathon if one is to invest in the refinery space due to decreased downside if crack spreads retreat.
2. Under the premise that in 12-18 months profitability will decline, investors should identify an exit strategy to lock in profits and be cautious on starting a position at the peak of the market to prevent capital loss.

If you disagree with those points or believe crack spreads will remain elevated for longer, that would be an appropriate comment for this space.
@Ronald Ferrie I think it was an excellent article. Unfortunately I’m getting creamed since initiating a position. Though it’s likely all about speculation on macroeconomics, I fear when the rebound comes it will be lack luster unless the market becomes so tight that it can’t be ignored.
poppagasket profile picture
deficit in refined products. see 3:55 mark interview on 4/6

@poppagasket Thanks confirms a lot of other comments I am hearing about the ultralow gasoline inventories being a big problem going into the summer driving season.
I posted this Bloomberg article in another Seeking Alpha post:
Danglinert profile picture
@poppagasket I wonder if the octane shortage is good or bad for us?
Danglinert profile picture
I think that all agree that crack spreads will decrease. My question for you is what do you think that the average annual income will be over the next five years. Even if earnings drop by half, by my math this is still a hell of a bargain. They have little debt and CA’s environmental extremism actually is good for business because it crowds out competition. Feel free to poke holes in my analysis.
Ronald Ferrie profile picture
@Danglinert Thanks for the comment. My general thesis revolves around these points:
1. If all agree that crack spreads will decrease, we can all agree total profits will also decrease. What reason is there to believe that the stock price will go up on a company with declining profits.
2. The shareholder return model is generally a small dividend compared to its peer with a modestly sized buyback program (roughly 10% of its market cap at today's prices). This does not standout significantly from its peers
3. Its larger peers have a more diversified business to allow it produce profits on a more reliable basis that does not rely solely on crack spreads.

Therefore I believe your investment dollars are better spent elsewhere. There really isn't anything "unique" about this investment other than its low debt profit and valuation compared to peers. Its valuation is lower because its profitability is less stable and less certain than its peers (see point 3).
Fishtown Capital profile picture
@Ronald Ferrie

1. You're stuck on the idea that "the stock in a company with a decline in year over year profits can't go up". That's just not a correct way of thinking about it.

Energy Transfer and many other midstream companies had a better year in 2021 than they did in 2022, because of a one-off boost due to Winter Storm Uri. But these stocks are all higher now even though earnings decline in 2022. Investors understood that Uri was a one-off event, and did not bid the stocks up as if the higher earnings were permanent. If investors believed PBF's 2022 earnings of $23 per share was sustainable, this would be a $200+ stock, not a $40 stock.

The past is irrelevant, we need to look forward. The things that really matter are

1. The current valuation
2. The future earnings

2. Again - look forward, not behind. PBF Management has already discussed getting down to a "more normal" cash balance of $1 billion, meaning they're going to be returning ~$2 billion to shareholders in the intermediate future. They've already discussed a higher dividend, and we'll see another repurchase authorization soon.

3. PBF again does own a midstream segment, but regardless, even if it had no midstream assets at all, that doesn't make it better or worse than peers - just a different risk/return profile.

The part about low debt and valuation - that's a pretty big deal.

Thanks again for the discussion. -FC
Ronald Ferrie profile picture
@Fishtown Capital I'd be interested on your thoughts on your points:
1. The current valuation
2. The future earnings

We have already discussed the cheaper valuation. You have no dispute from me there.

The future earnings is the part where I am "stuck". You and I both have agreed to the point that future earnings will/should contract. If earnings are contracting compared to peers, (I will assume the multiple does not contract also), the implied price would also experience contraction. I think we agree the bigger midstreams will allow the larger peers to experience a lesser decline.

I do not see a path for multiple expansion under a backdrop of declining earnings.

I will not dispute anything you are saying on the "intent" of management to return capital to shareholders. This plan becomes harder (not impossible) to execute with declining profitability. There is just less discretionary cash to deploy to shareholders unless the company takes out debt.

With that said, I will acknowledge that it is possible for everything you are saying to be true.

My biggest point is that if I were looking to invest $10,000 today, I feel it would produce better returns else where. Not that you can't make money with PBF, but there just isn't anything "special" about PBF.

All refiners benefit from the high crack spreads. If PBFs profits remain elevated, so do Marathon's, Phillip 66's, Valero's etc. If profits slip due to lowering crack spreads, the down side is lesser with the three I just mentioned because they have midstream and chemical related aspects to their companies.

I think if you are more bullish on crack spreads remaining higher for longer, PBF would be the ultimate winner since it gets 95% of its earnings from the refineries (5% associated to midstream as you pointed out earlier).
Pbf is trash. Headed back to Covid levels
Bulldog67 profile picture

Could you please enlighten us with your in depth analysis (for those less knowledgeable)?

Hope your first two posts added more to the conversation that this one did!
This should bring a cheer from the legions of PBF short sellers.
@medzjohn exactly. It’s over for Pbf
@SuperContrarian That's right. It's a slam dunk. Nobody's gonna buy gasoline or diesel ever again.
CincinnatiRick profile picture
@Ronald Ferrie I note that others have already taken issue with several points in your cautionary thesis but this one, in particular, set off an alarm for me: "I believe this has the potential to last for the next 12 to 18 months, at which time, new project developments will lead to downward pressure on margins."

It has been my understanding for many years now that current refining assets were increasingly valuable in that it was very nearly impossible to construct substantial new facilities in this country. You are seeming to indicate that this is not only possible but that, even with the long lead times required, that increased capacity is well along in development...in effect breaking that quasi-monopoly and even bringing an impending glut. Can you delineate which such projects are nearing fruition and roughly the timelines and capacities you anticipate?
@CincinnatiRick Author is correct about upcoming capacity increases. However, nearly all of these are outside the US, mostly Middle East and Far East. In the first US refinery expansion in years, Exxon recently added capacity to its Beaumont, TX operations, which will be mostly offset by the closure of the Houston refinery of Lyondell Basel. In addition, like PBF, many refining companies are focused on converting existing operations to renewable diesel/sustainable aviation fuel (CVX, BP, MPC, CLMT, VLO, VTNR), as opposed to adding incremental traditional refining capacity.


Fishtown Capital profile picture
@CincinnatiRick Rick, the author is correct on this point. Remember that like oil, refined products are a global market. There is significant capacity coming online, mostly in the ME and APAC.

In the US, we have XOM Beaumont, CVE Toledo and Superior coming back online, as well as some RD projects starting (including PBF's.) Refiners also have gotten good at "de-bottlenecking", so they can increase capacity incrementally without building a brand new refinery.

That's supply side- on the demand side, we have the US demand increasing, China increasing rapidly, India increasing, plus logistical issues with the Russia crude and product bans.

The million dollar question is, where is the balance? No one knows. Last few EIA reports have been very bullish, but the market is not seeming to care yet. The next few months will be extremely interesting.
poppagasket profile picture
BofA positive outlook:

U.S. oil refiners looking at 'record' Q1 profits ahead of peak summer season
2:12 pm ET April 6, 2023 (MarketWatch)
By Claudia Assis

Top picks include Valero, PBF, Marathon

U.S. oil refiners are expected to report "record" quarterly profits during a traditionally weak season, analysts at BofA Securities said in a note Thursday, calling it a "golden age of refining."

The analysts on average raised their first-quarter earnings expectations for refiners by 9%, thanks to a "strong finish" for crack spreads, or the difference between crude oil futures prices and prices for gasoline and other refined products.

"We find a single trend for all names under coverage: record 1Q23 earnings for what is normally the lowest seasonal earnings of the year and a set-up we see potentially supporting continued strength in the run up to the driving season," the analysts, led by Doug Leggate, said in the note.

BofA said refiners Valero Energy Corp. (VLO) and PBF Energy Inc. (PBF) continue to enjoy the "the best leverage to a robust refining environment."

For its turn, Marathon Petroleum Corp. (MPC) offers the "most robust buyback program in energy, with more than a third of shares repurchased since 2021, with no slowdown in sight," the analysts said.

Refined products have seen the highest seasonal demand in five years and for gasoline and jet fuel the highest absolute demand since the start of the pandemic, the BofA analysts said.

"With retail gasoline prices holding around $3.50/gal, we continue to expect the first 'normal' driving season since COVID, but with over 1mm bpd of net refinery closures increasing US dependency on gasoline imports, particularly on the US East Coast," they said.

Refiner stocks have lost ground this week, reeling from Saudi Arabia and its OPEC+ allies surprising markets last weekend by announcing another round of production cuts, prompting a rally for crude futures

For the last 12 months, however, the stocks far outperform an energy ETF and the broader equity market.

Shares of Valero are up 28% in the period, while shares of Marathon gained 51%. PBF stock is up 56%. That compares with an advance of 12% for the SPDR Energy Select ETF (XLE), and contrasts with losses of around 8% for the S&P 500 index .

-Claudia Assis
Blackbox777 profile picture
@poppagasket We'll find out on how good Q1 is in a month.
In the meantime, I hope PBF can hold $40 price.
Bulldog67 profile picture

I hope it breaks 40 so I can buy more!
Meanwhile, JPM just raised its PT to $60. Good company. Excellent factor grades on Seeking Alpha.
To rely on EIA predictions and projections for future crack spreads or anything else for investment decisions is a good way to be wrong. They are politicized bureaucrats with no accountability for being wrong. Agree cracks are cyclical and we are on the downside of 2022 highs, so caution is in order. Analyzing supply/demand factors affecting future cracks and what is already priced into PBF stock price is a tough challenge. My view is that PBF has too much exposure to the California Crazies who think they can regulate, legislate, and use central planning to create prosperity for all there. Other refiners that do not have to deal with California issues and that uncertainty may provide better investment opportunities.
interesting point. california has led the demand commitments for renewable diesel, followed by several other states and triggering the capex ramp. it is with some irony that much volume will be imported into california.
Ronald Ferrie profile picture
@nesd Thanks for the comment. I agree, and using anyones predictions for that matter is just someone's guess.

I also agree there is some political uncertainty but I try to stay away from those points in my articles because its anyones guess as to how they play out.
Fishtown Capital profile picture
Much as your article is based around the idea that PBF does not own any midstream or logistics assets.

"Larger peers like Phillips 66 or Marathon have other "legs" to their business such as retail and midstream companies to stabilize cash flows during downturns.
For comparison sake, Marathon and Phillips 66 generate roughly 20% and 40% respectively of their profits from their midstream business.

PBF does not have this same luxury"

This isn't correct. PBF has 100% ownership of it's logistics and pipeline business. It used to trade as PBFX, and PBF bought out the remaining ~50% ownership last year. It was acquired at a $1.2B valuation (which implies 20-25% of PBF's market cap is the midstream segment) and produces around $150m of income a year. It's not as high as MPC ($59B cap with $23B, or 38%, being MPLX) but it's there.

You don't discuss relative valuation of PBF versus the other refiners, which is pretty relevant. As far as crack spreads normalizing in 2024+, this is already well known by the market and why the major refiners are trading at 5-6x this years earnings (versus 3.5x for PBF) and 10x next years earnings (5.85x for PBF.)

Then there's the cash story. PBF, after receiving the payment for ENI, will have around $1.5 in net cash (3B cash vs. 1.5b debt) on its $5.5B market cap. $2-4 natural gas prices makes NA refiners competitively positioned in the world. If we keep "good" crack spreads for another 4-5 quarters, PBF will cash flow its entire enterprise valuation.

So if the ultimate thesis is "crack spreads are likely lower next year", this is already well understood by the market.
Bulldog67 profile picture
@Fishtown Capital

Great reply! I was going to point out the PBFX acquisition also. And the author does not even mention PBF's JV with Eni for the renewable project.

Hopefully most PBF investors understand that EPS will be down in 2023 vs 2022, and down again in 2024. But the company, with much debt paid down, will still have very attractive FCF both this year and next year. As you have pointed out in your recent article, the JV, and the huge cash infusion, can be a game changer.

Best regards,
@Fishtown Capital
please correct if mistaken, but the 'new' capacity for renewable diesel is still at or below expected demand based on jurisdictions that have already dated commitment mandates. thus the overall demand for refinery output remains at or below total projected demand.
NIMBY durability.
Windy Hill profile picture
@translate Umm. "overall demand" or "capacity"?
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