VLO - Top 3 U.S. Refiners On Relative Value
2023-05-16 13:16:44 ET
Summary
- Eight US refiners were compared using a value matrix with factors including valuation, FCF, debt, forward yield, and payout ratio.
- Although I expect refiners' earnings to remain elevated, I also expect share price volatility to continue on energy sector sentiment and broader economic concerns.
- Investors are likely to have opportunities to buy US refiners at bargain prices well below those available over most of the last year.
- The value matrix is not intended to serve as complete analysis of any of the refiners considered. Its only purpose is to objectively compare similar investments side by side.
- Based on the value matrix, PBF, PARR, and DINO appear to be the three most favorable investments in the industry.
Background
I recently completed a review of the US refining sector entitled U.S. Refiners: Earnings Review & Outlook wherein I reviewed the industry's recent outperformance on quarterly results. 100% of US refiners exceeded earnings expectations by substantial margins while 75% beat expectations on revenues. Despite excellent quarterly results the industry has fallen about 15% over the last month. Currently, US refiners are favorably valued with their lowest PE ratios in recent history. Further revenues and earnings appear to be well supported by high refinery utilization rates and growing crack spreads.
Falling share prices on growing earnings seem likely to present great buying opportunities for value investors. As an added bonus, the average US refiner has a forward yield of almost 4% with a sustainable average payout of just 10%. However, given current market sentiment and broader economic outlook, these stocks could get even cheaper.
"Opportunity Comes To the Prepared Mind" - Charlie Munger
Charlie Munger also said, "Success means being very patient, but aggressive when it's time". As an investor, my strategy would be combine those two bits of wisdom and be prepared to act aggressively. For that purpose, my next step is a relative evaluation of US refiners on a multi-factor matrix.
Relative Value Matrix
Eight US refiners were compared using a value matrix with the following factors:
- PE (MRFQ) - PE ratio was calculated based on current price and most recent quarterly earnings. A lower PE was considered most favorable.
- FCF Margin - A higher FCF margin was considered more favorable
- Net Debt/Market Cap - A lower ratio of net debt to market cap was considered more favorable
- Forward Yield - A higher forward yield was considered more favorable
-
Payout Ratio - A lower payout was considered more favorable
The figures for each company's factors were normalized by means of statistical percent ranking with relation to the group. The value matrix was calculated as the sum of the percent ranks of the factors.
Value Matrix
The above chart is sorted in descending order from most favorable (highest value matrix score) to least favorable (lowest value matrix score).
Value Matrix Plot
The value matrix is presented graphically in the stacked bar chart above with cumulative inputs for each factor. Based on this analysis, the top 3 US refiners with the most favorable combination of the factors considered are:
Value Matrix Limitations
If I had a well researched analysis of all eight US refiners in hand, identifying the most favorable among them would likely remain a subjective decision. As an investor, I am compelled to not only identify a favorable industry but also make a methodical effort to objectively identify the most favorable investments within that space.
None the less, investors should consider the US refiners value matrix a screen only. Its results are best considered a starting point for further analysis or as means to compare otherwise equally favorable investments side by side. Readers are advised to consider each investment on its own merits including considerations not addressed within the value matrix.
Conclusions and Recommendations
Based on my previous review US refiners, U.S. Refiners: Earnings Review & Outlook , I expect refiners earnings to remain elevated. I also expect share price volatility to continue on poor energy sector sentiment and broader economic concerns. I would advise investors who hold those refiners with the lowest value scores to review their positions.
It is my intention to stay invested in the sector by holding one or more of the most favorable refiners. Those investors who are interested in the sector might first consider one of the top three on relative value, PBF, PARR, or DINO. I will continue to follow the industry by evaluating individual refiners.
Opportunity Comes To the Prepared Mind - Charlie Munger
For further details see:
Top 3 U.S. Refiners On Relative Value