- Weighing the latest information from Texas' deep freeze, J.P. Morgan is reflecting on a more optimistic outlook for U.S. refineries - and says it would shift some capital that way, with industry conditions improving.
- The firm is raising crack spread forecasts, taking into account not only shorter-term supply disruption impacts from the Texas freeze, but also pent-up demand from the COVID-19 recovery, and longer-term impacts of "permanent U.S. capacity reductions, particularly for gasoline."
- Refiners have lagged exploration/production companies during the recovery, "for good reason, until now," the firm says. Downstream has lagged upstream by about 13% since the end of 2019, and the recovery off the bottom has been slower for refining margins than for oil prices.
- "Refiners have been hit by the double whammy of weak demand and tight crude diffs caused by OPEC Plus curtailments and shale discipline," the firm says. "However, with demand now improving and OPEC Plus committed to release some barrels back to the market, we think that this should be good for refiners."
- Meanwhile, the weight of COVID-19 on near-term mobility should begin to lighten, in part due to vaccine distribution progress. That could make gasoline distribution dynamics "fairly snug" considering capacity reductions.
- And diesel margins could take a little longer to recover given knock-on effects of a lagged recovery in demand for jet fuel - though demand has been strong on a combination of shipping-related end markets and cold weather.
- Extending its models into 2023, J.P. Morgan sees about 20% total return potential for the sector by the end of the year. (Further out, it says electric vehicle penetration rates will become a headwind, though likely not until at least 2025.)
- In terms of individual stocks, the new look has led to shuffled ratings as well. It's staying Overweight on Valero (NYSE:VLO) due to "pure-play GC refining exposure and growing Renewable Diesel business," and it's upgrading Marathon Petroleum (NYSE:MPC) to Overweight as well - "as we like its post-Speedway sale setup, with higher torque to refining, improved spending discipline on capex/opex, a much improved balance sheet and potential for material share buybacks."
- A Valero price target boost to $87 from $71 implies 17% upside, while a raise in its Marathon target to $67 from $52 implies 22% upside from current pricing.
- It's also upgrading Par Pacific Holdings (NYSE:PARR) to Neutral since it's materially lagged peers so far in 2021.
- On the flip side, it's downgrading Phillips 66 (NYSE:PSX) to Neutral, expecting lower-than-consensus earnings this year. And it's staying Neutral on HollyFrontier (NYSE:HFC) due to near-term capex profile.
- The firm is also remaining relative Underweight on Delek U.S. Holdings (NYSE:DK) and PBF Energy (NYSE:PBF) due to valuation/leverage profiles.