Goldman Sachs Upgrades Refiners Ahead of Earnings Season (FTO, SUN, WNR, TSO, VLO, HOC)

Goldman Sachs is out with a research report this morning, where it updated estimates on refiners ahead of the Q2 2010 earnings season. The changes to their estimates primarily reflect marked-to-market crack spreads during the quarter. The GS analysts said, “Our estimates move mostly higher for 2Q2010, due to higher crack spreads and assumed capture rates. 2011-2013 estimate changes are mixed, with company specific changes to capture rates, utilization rates, and costs driving differences in impact.” They also noted, “We have also lowered our 6-month price target for Tesoro TSO to $14 from $16 to better reflect the impact of the Anacortes refinery fire during the quarter and continued uncertainty surrounding the asset. Our target price is based on asset value and cash flow valuation analyses; key risk is refining margin volatility. We remain Neutral-rated on Tesoro.” Goldman Sachs’ analysts said that they “expect (the) 2Q2010 earnings season to improve meaningfully following very weak first quarter results.” They said that the industry in currently in a “trough” and that a gradual recovery is expected in the years ahead. They noted, “we see (the) 2Q earnings season as more of a non-event for refining equities, despite the higher earnings.” They added, “In our view, refining equities continue to offer less attractive risk/reward compared to our more favorably positioned integrated oils. We see, on average, 2% upside to our six-month target prices (based on asset value and cash flow valuation analyses). While we currently have no Buy rated names, we continue to be believe Holly HOC is well positioned versus peers, owing to its niche market exposure and strong balance sheet. We remain Sell-rated on refiners highly exposed to East and Gulf Coast markets like Sunoco SUN and Valero VLO, both of which we believe will be disproportionately impacted by industry oversupply, product import pressure, and difficult end-market demand trends.” In regards to estimates, Goldman Sachs analysts said, “Our Sunoco, Frontier Oil FTO, and Western Refining WNR estimates move higher in 2011 due to higher assumed capture rates on their respective benchmark refining margins. Our 2012-2013 estimate changes reflect various more-minor modeling adjustments. Our Tesoro estimates move lower in 2011 and higher in 2012 primarily given a slower assumed improvement in West Coast refining margins. We do not view these or our other more minor estimate changes as material to our views. These changes have no impact on our 6-month price targets, which are based on asset values and cash flow valuation analyses.”