PBF - PBF Energy: The Regional Refining Capacity Squeeze

2024-04-02 17:57:07 ET

Summary

• Refiners like PBF Energy operate as manufacturing firms, converting crude oil into refined products.
• Decline in US and European refining capacity, coupled with high natural gas prices, will keep refiners' profit margins elevated.
• PBF Energy is undervalued compared to its peers, with a potential price target of $71.50, representing a 22% premium.
• California is PBF's most important regional market and plunging refining capacity could drive elevated refining margins this summer.
• Elevated clean tanker rates drive up the cost of importing refined products to offset declining regional refinery capacity.

The refining business is rather unique in energy because refiners don’t benefit directly from higher oil or natural gas prices.

The best way to think about refiners is that they’re manufacturing firms; like all manufacturers, they convert various raw materials into finished goods used by consumers and businesses.

In this case, the largest single raw material for refiners is crude oil fed into their facilities and their finished goods include refined products like gasoline, diesel, jet fuel, heating oil and kerosene.

PBF Energy ( PBF ) owns six refineries in the US with total daily throughput of a little over one million bbl/day of oil. As I’ll explain in this article, I believe the decline in US and European refining capacity in recent years coupled with still-high natural gas prices outside the US will keep crack spreads – a measure of refiners’ profit margins – at historically elevated levels, particularly in capacity-constrained markets like California....

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