Citi Downgrades Refiners: What You Should Know

• Citi has downgraded a handful of U.S. refiner stocks based on shrinking differentials and falling production.
• The firm maintains Buy ratings on several names in the space.
• Citi predicts a $4.50/bbl WTI/Brent differential in 2016.

Earnings season for U.S. refiners is kicking off soon, and Citi Research analyst Faisel Khan recently previewed refiner earnings and downgraded several names in the space. Citi believes that narrowing differentials will continue to weigh on refiner margins in the near future.

The numbers
Narrowing differentials have come as a result of the recent pipeline expansions and production slowdowns in the U.S. Citi predicts that this environment will not change anytime soon.

The firm’s latest forecast calls for Brent-WTI differential of only $4.50/bbl, much lower than the previous forecast of $8/bbl. Citi is now calling for parity among LLS, ANS and Brent.

“On the flipside, we are increasing out gasoline margin assumptions by $2 per barrel and keep our distillate margins unchanged,” Khan adds.

M&A
Citi generally believes that independent refiners are quicker to pull the trigger on buying opportunities than major oil companies. The firm is positive on PBF Energy Inc PBF’s acquisitions of the Torrance and Chalmette refineries.

Outlook
In the report, Citi downgraded the following refiners from Buy to Neutral:
HollyFrontier Corp HFC
Western Refining, Inc . WNR
CVR Refining LP CVRR
Alon USA Partners LP ALDW
Northern Tier Energy LP NTI

The firm maintains its Buy rating on these names:
Phillips 66 PSX (price target $88)
Marathon Petroleum Corp MPC (price target $70)
Valero Energy Corporation VLO (price target $74)
PBF Energy (price target $48)
Disclosure: the author holds no position in the stocks mentioned.