2023-06-26 12:45:09 ET
Summary
- PBF Energy offers a compelling value proposition with strong financial performance at an attractive valuation.
- The company's recent earnings report and management transition indicate stability and potential for continued income generation.
- We think a high-yielding option trade is the best way to capitalize on PBF's stable business model and potentially acquire shares beneath 1x TTM FCF.
A few months ago, we wrote an article titled " PBF Energy: Earn A 16% Yield With This Deep Value Gem ", which was centered around PBF Energy ( PBF ) and the opportunity available at the time in U.S. refiners.
We highlighted the company's strong track record and attractive valuation, and concluded the article by arguing that the company was a buy, as the valuation was significantly discounted as to provide a significant margin of safety, even in a bearish scenario for refining spreads.
We wrapped our thesis up by offering what we thought at the time was a great risk-reward trade opportunity; selling the June 16th, $31 strike put options for $0.75 per contract (a 2.48% return over ~66 days).
Recently, that trade reached a successful conclusion and expired at max profit. We think a similar opportunity now exists in the stock.
Today, we'll review the company's value proposition, highlight a few new developments that make another put sale appealing, and dive into that trade's specifics for those who may be looking to get involved in PBF with a more income-oriented approach.
Review
In case you didn't read our previous article, or are new to PBF Energy in general, here's some key information to help bring you up to speed:
1.) PBF Energy is an independent petroleum refiner and supplier of transportation fuels, heating oil, and other petroleum products in the United States. The company owns and operates six domestic oil refineries and related assets with a combined processing capacity of approximately 1,000,000 bpd. The company's refineries are located in California, Delaware, Louisiana, New Jersey and Ohio.
2.) Financially, PBF has delivered impressive results over the past twelve months. It recorded approximately $47 billion in revenue and retained $4.2 billion in free cash flow, translating into a solid cash flow margin of around 9%. These figures indicate the company's efficiency in converting its top-line revenue into tangible profits:
These strong financial results follow a previous period where PBF reported significantly lower revenue and free cash flow. The substantial growth in recent periods can be attributed to the surge in energy markets, driven by factors such as the war in Ukraine and disruptions in the global supply chain. PBF has benefited from higher energy prices and reduced competition, leading to improved profitability.
3.) Historically, PBF's financial performance has remained strong. In the four years preceding the energy market shakeups in 2020, the company averaged $22.3 billion in revenue and $442 million in free cash flow. These figures, although lower than the most recent twelve-month period, demonstrate PBF's ability to navigate both challenging and favorable market conditions.
4.) From a financial health perspective, PBF remains sturdy. The company's total assets considerably outweigh its liabilities, and its book value stands above $5.2 billion. Moreover, the company maintains a robust liquidity position, with total current assets of $5.4 billion, which exceeds its combined short-term liabilities by a significant margin. The company is also shrinking its long-term debt pile, which now stands at only $2 billion.
5.) PBF's valuation provides timing to our thesis. While a great company overall, currently, the market is pricing the company's shares at an extremely attractive level. With a market capitalization of $5 billion and TTM free cash flow of $4.2 billion, PBF has a remarkably low multiple of only 1.18x TTM free cash flow. While this figure is unlikely to be sustained, even on "normalized" numbers, the valuation seems attractive for such a stable, profitable refiner.
Developments
Now that we're all up to speed on why we think the company offers compelling value, there's been some updates from to the company's story that are worth sharing here. Mainly, earnings. In short, things remain solid for the company since our initial article.
PBF Energy reported earnings on May 5th and achieved beats across the board. GAAP EPS came in at $2.86, which was $0.26 above estimates. Revenue came in at $9.3 billion, which was nearly $1 billion more than expected, which is incredibly promising.
This massive revenue beat underlines our thesis that refining spreads remain high due to a structural lack of investment in refining capacity in the previous cycle.
However, YoY revenue growth was meager at only 1.86%, which indicates that the growth PBF saw in 2022 is likely over. Analysts are expecting declining revenue and EPS over the next few years as refining volumes and margins come back in line:
Broadly, we agree with these expectations, although, again, we think there may be some upside above these estimates as a result of the aforementioned underinvestment.
In addition to the recent earnings report, PBF also named the successor to the current CEO (Tom Nimbley) as Matthew Lucey. As a company president and ingrained company insider, we expect that Lucey won't rock the boat much, and should keep the company's operations running smoothly.
We view this transition as a non-impactful event, although it's worth mentioning.
Taken together, things seem to be humming along for PBF Energy, and we think the stock is well-positioned for another simple, high yielding option trade.
The Trade
While the stock may be attractive, shares of companies in the refining industry continue to remain highly volatile on a day-to-day basis due to swings in commodity prices. Thus, we think a similar trade to our first successful recommendation a few months ago continues to be the most optimal way to deploy capital.
For us, we like shorting the September 15th, $32 strike puts that are currently trading for $0.95 cents on the bid:
These contracts return 3.06% cash-on-cash, which annualizes to about 13.5%; a healthy return. In addition, these contracts boast a -21% breakeven point, which means that the stock has some room to drop, and the trade still may end up profitable.
Finally - if assigned, put sellers would be acquiring shares at a strong recent support level in the stock, as well as at a highly attractive ~0.99x free cash flow multiple - under 1x TTM FCF .
To us, this setup seems like a clear win-win scenario, even as financial performance comes back in line.
Risks
While our idea has a significant probability of success and a solid return profile, there are some risks to be concerned about, just like last time:
Macro Risk : While PBF Energy Inc. does a good job of controlling its own operations, there’s less control that it has over interest rates and government policy. It’s possible that government regulations could come down harder on the politically unpopular legacy energy industry, which may hurt potential profits or increase compliance costs.
Commodity Risk : As PBF is a refining company, their profit margin is somewhat determined by the prices of the raw products they take in (crude oil), and the refined products they put out (Gasoline, Heating Oil, etc.). All of these markets are highly liquid and exchange-traded, and thus unfavorable spreads could hurt margins or even cause losses.
Technical Risk : On the weekly timeframe, some may argue that PBF stock is overbought, according to a number of different technical indicators. We think there is room to continue higher, but it’s possible that a technical correction (sentiment based) may strike and cost investors some losses.
There are some risks to be aware of, however, we think the potential for returns and upside far outweighs the concerns.
Summary
All in all, we remain bullish on PBF Energy. The company has performed well and is poised for more upside. It also remains materially undervalued in light of continued positive developments and earnings reports.
We think a repeat trade, similar to the one we called out previously, is a great way to take advantage of the solid underlying fundamentals and potentially acquire a stake in this deep value gem at an even more attractive price.
For further details see:
PBF Energy: Still Very Cheap And Returning 13.5%