Barclays Previews Q3 Oil Earnings: Integrated Vs. Refiners

Integrated Oil companies are likely to report flattish Q3 results, and most refiners would likely miss consensus expectations, Barclays’ Paul Y. Cheng said in a report. He added that Q3 was largely a non-volatile quarter.

During the quarter, light crude remained muted below $50 per barrel, while U.S. refining cracks average was sequentially flat and there was a modest seasonal expansion in integrated marketing margins, Cheng noted. He added that although U.S. natural gas prices rose, the average didn't reflect any underlying momentum shift.

Related Link: The Difference Between Brent Crude And West Texas Intermediate Oil, And How They Trade

Rating Changes

• PBF Energy Inc PBF – Downgraded from Equal-weight to Underweight. Price target reduced from $26 to $19.
• Western Refining, Inc. WNR – Downgraded from Overweight to Equal-weight. Price target raised from $29 to $30.

Price Target Raised

• Imperial Oil Limited (USA) IMO – Rated Equal-weight. Price target raised from $48 to $50.
• Petroleo Brasileiro SA Petrobras (ADR) PBR – Rated Underweight. Price target raised from $9 to $10.
• Suncor Energy Inc. (USA) SU – Rated Overweight. Price target raised from $48 to $50.
• Alon USA Energy, Inc. ALJ – Rated Equal-weight. Price target raised from $8 to $10.
• CVR Refining LP CVRR – Rated Underweight. Price target raised from $6 to $9.
• Delek US Holdings, Inc. DK – Rated Equal-weight. Price target raised from $16 to $19.
• HollyFrontier Corp HFC – Rated Overweight. Price target raised from $32 to $35.
• Tesoro Corporation TSO – Rated Overweight. Price target raised from $100 to $105.

Price Target Reduced

• Alon USA Partners LP ALDW - Rated Underweight. Price target reduced from $9 to $8.
• Phillips 66 PSX – Rated Equal-weight. Price target reduced from $86 to $84.

Global Oil Market

“We think the Major oil companies are currently valued at a long-term oil price deck of $65- $70/bl Brent,” Cheng wrote. He reiterated a Positive view on the sector, expecting it to outperform the general market over the next 12-18 months. Global oil prices could average significantly higher than the current consensus estimates and could reach $80-$85 per barrel by end-2017.

The analyst named Suncor Energy as the Top Pick among large cap names. He added that ConocoPhillips COP [Rated Overweight, PT: $60] seemed well positioned among the mega cap names for an oil price recovery, and would likely outperform Chevron Corporation CVX [Rated Equal-weight, PT: $125] and Exxon Mobil Corporation XOM [Rated Equal-weight, PT: $100] if oil prices sustain at more than $55 per barrel.

US Refining

“We believe 2016 is probably a lost year for the U.S. refining industry. After an extraordinarily warm winter that sapped U.S. and global home heating demand and induced record gasoline runs during the seasonal low in consumption, the first quarter became a graveyard for U.S. margins,” Cheng commented.

The composite margin, including gasoline and diesel, would likely continue to decline on a sequential basis for the rest of the year. The analyst explained that this is important to prevent overproduction during a seasonally weak gasoline demand period and, distillate inventories remained too high for diesel prices to result make a difference.

Performance In Q3

Cheng expects Chevron, Exxon Mobil, Imperial Oil, Petrobras and Suncor Energy to report positive earnings in Q3, while anticipating net losses from ConocoPhillips, Cenovus Energy Inc (USA) CVE [Rated Overweight, PT: $24], Hess Corp. HES [Rated Equal-weight, PT: $64], Husky Energy Inc (USA) HUSKF [Rated Overweight, PT: $23] and Murphy Oil Corporation MUR [Rated Overweight, PT: $42].

“We expect majors to report in line / slightly under consensus…We expect refiners to come in mostly below consensus in 3Q16. But importantly, we forecast 2016 will mark the near-term low point for U.S. refining margins and expect earnings to recover over the next several years. We believe the large cap refiners could yield solid positive returns over the next 12-18 months,” the analyst stated.

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