DINO - Refining Sector Earnings Trends And Expectations

2023-04-25 13:52:29 ET

Summary

• Although US refiners outperformed the broader market over the last year, the sector has been weak over the last month.
• However, industry trends over recent years are strong with growing revenues and earnings.
• Refiner revenues and earnings appear to be well supported by high refinery utilization rates and healthy crack spreads.
• Investors will be wise to keep an eye on refiners who report earlier to better inform their investment decisions.
• Additionally, US EIA will provide updated refinery utilization and crack spread reports before most refiners report results.

Background

I recently examined US Refiners in a review entitled U.S. Oil Refining Stocks Ranked By Quality . Despite recent economic uncertainty and energy sector weakness, the US refining sector may still be a good place to look for value and solid future returns. With earnings quickly approaching, it seems like an opportune time to revisit US refiners

US Refiner Earnings Dates

US refiners will begin reporting earnings this week starting with Valero Energy Corporation (VLO) on April 27th followed closely by CVR Energy, Inc. ( CVI ) on the 1st of May.

I own HF Sinclair Corporation ( DINO ) and am considering broadening my exposure to the sector with Marathon Petroleum Corporation ( MPC ). I will be watching the earlier earnings reports closely so as to better inform my own portfolio management.

Recent Price Performance

Over the last year, US refiners climbed an average of 22% with the biggest gainer Par Pacific Holdings, Inc ( PARR ) leading with a 54% gain. However, over the last month, the sector has been weak sliding over 8% on average with PBF Energy Inc. ( PBF ) losing 17%. So far, it appears as though the sector has mostly declined on general market uncertainty and broader weakness in the energy sector.

Revenue and EBITDA Trends Are Positive So Far

Revenue Trends

Over three years and YOY, industry revenues are up 21% and 67% on average respectively. DINO appears to be leading the pack with YOY revenue growth over 100%.

EBITDA Trends

Over three years, industry EBITDAs are up 37% with PBF EBITDA nearly doubling. YOY, EBITDA growth is literally off the chart with values as noted above. The phenomenal earnings growth, led by PARR at 2118%, has resulted largely from growing crack spreads.

Crack Spread Sensitivity and Recent Trends

I am often surprised when refiners follow energy prices down as they are buyers of crude oil, natural gas, and blending stocks. In fact, energy sector weakness can sometimes benefit refiners as crack spread increases.

The following chart from MPC's recent 10-K provides crack spread and other sensitivities with relation to commodity prices.

MPS Sensitivity Analysis

Crack spread is essentially the difference between commodity input costs and the market value of refined output products. MPC's crack spread sensitivity is estimated to equal a swing of about $1.08B in annual EBITDA per $1.00/bbl change in input costs. These data are specifically for MPC but are somewhat representative of the industry. Similar data for other refiners can often be found in those refiners' form 10-K in the required Quantitative and Qualitative Disclosures About Market Risk section or investor presentations. According to recent data from US EIA , the RBOB (Reformulated Gasoline Blendstock for Oxygenate Blending) crack spread appears to be widening.

RBOB Gasoline Crack Spread: $/gallon

The plot above was already data rich but, I found it useful to add annotations in red. The gray shaded area represents the five year range while the blue and brown lines represent 5 year averages and 2022 data respectively. The green points on the left are the most recent data; they are historically high. The big takeaway (as noted above in red) is RBOB crack has increased in the first two months of FQ1 23 to about $25/bbl from just $17/bbl in FQ4 22.

US EIA tracks similar data with regards to distillates and brent crude. Further, Investors may want to keep an eye on these data as they will be updated at the end of month just before most refiners report earnings.

Crack Spreads Are Supported by High Refinery Utilization

Since 1985, US EIA has tracked US refining capacity; the following plot was generated from EIA's most recent reports .

US Refining Capacity and Utilization

Although refinery utilization is still near a 3Yr high, the most recent data from EIA show a 1.5% drop in utilization from late December of 2022 to late January of this year. This may not be a cause for concern as utilization often approaches its yearly lows in late winter. Investors may want to keep an eye on the data as it will be updated on the 28th of this month just before most refiners report earnings. And finally, onward to earnings estimates.

Newsflash: Analysts Are Often Wrong

I count myself in the group, but the analysts covering the US refining sector might have lowered the bar even further. They have recently underestimated revenue and earnings in the US refining sector in most cases.

FQ4 22 Revenue & Earnings Surprises

With regard to FQ4 22 results, the average revenue surprise was +9% while the average earnings surprise was +2%. With relation to MPC, analyst underestimations of revenue and EPS appear to be a long-term trend.

MPC Actual Revenue & Earnings and Estimates

Over the last ten quarters, analysts have consistently underestimated both MPC revenue and earnings . This record alone is nearly enough cause to expect MPC to beat on revenue and earnings on April, 2nd.

How Will the Market React to Solid FQ1 23 Results?

The bad news is, based on MPC performance (subsequent to four solid earnings beats) over the last year, the market probably won't be impressed.

MPC Price Performance Near Earnings Reports

Over the last four quarters, MPC has generally declined about 5% within days after reporting analyst beating earnings. This pattern may be a classic case of the "sell the news" mantra. The good news is investors who are betting on a solid earnings beat need not feel rushed to accumulate a position before earnings are reported. Personally, I don't care to rush.

Final Thoughts

Although US refiners outperformed the broader market over the last year, the sector has been weak over the last month. However, industry earnings trends over recent years are strong with growing revenues and earnings. Going forward, I expect refiner revenues and earnings to be well supported by high refinery utilization rates and healthy crack spreads.

Based on recent analyst estimates vs actual results, I expect many refiners to beat estimates. Investors will be wise to keep an eye refiners who report earlier to better inform their investment decisions. Additionally, US EIA will provide updated refinery utilization and crack spread reports before most refiners report results.

I will be watching early results, EIA updates, and other news carefully and will post relevant updates in comments. If the wind is favorable, I intend to carefully and patiently increase my exposure to the sector from 2% to as much as 4% of my trading portfolio.

Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present. - Marcus Aurelius, Meditations

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