Macquarie Turns Bullish On U.S. Refiners: Here's Why

In a new report, Macquarie Research analyst Vikas Dwivedi explains the firm’s updated bullish outlook for U.S. independent refiners. Macquarie initiated coverage on U.S. refiners on Friday with five new Outperform ratings in the space.

Long-Term Outlook

Dwivedi sees the long-term outlook for refiners as positive for a number of reasons. While oil demand remains above 1 MM BPD, refining capacity continues to be tight. Oil finding and development (F&P) costs have fallen to $25/BBL, lowering crude production break-even levels. Finally, there has been an increase in capital discipline in the space, which opens the doors for special dividends and share buybacks.

Value Opportunities

Despite concerns over the outlook for U.S. crude oil production growth, Dwivedi believes that there is plenty of long-term value in the refining market.

“In addition to a favourable commodity backdrop, we believe the next five years have an unprecedented number of opportunities, including (1) yield enhancements; (2) securing crude access and quality; (3) MLP opportunities; (4) product disposition; and (5) TSR maximization via dividends and share repurchases,” Dwivedi explained.

Stock Picks

Macquarie initiated coverage with an Outperform rating on the following five stocks:

PBF Energy Inc PBF
Delek U.S. Holdings, Inc. DK
Valero Energy Corporation VLO
Tesoro Corporation TSO
HollyFrontier Corp HFC

While the price of crude oil has plummeted more than 51 percent in the past year and dragged down most of the U.S. energy sector along with it, each of the five Outperform-rated refiners have generated positive returns in the last 12 months. The stocks of Delek, Valero and Tesoro have all climbed more than 30 percent in the past year.