2023-05-14 02:16:04 ET
Summary
- PBF Energy generated an ample amount of free cash flow of $4.1 billion in 2022, while their debt level declined from over $5b in 2021 to $2.6b in 2022.
- Increasing demand for gasoline and low inventory levels would positively affect U.S. gasoline prices in the next few months.
- U.S. motor gasoline consumption in 2023 can be 100 thousand barrels per day higher than in 2022 and is expected to increase further in 2024.
- However, gasoline and diesel prices in the United States in 2023 are expected to be lower than in 2022 and higher than in 2020 and 2021.
Introduction
PBF Energy ( PBF ) is a leading petroleum refiner in the United States, specializing in the production of unbranded transportation fuels, heating oil, lubricants, and other petroleum products from crude oil and other feedstock stocks. With six refineries across the country, PBF caters to a diverse customer base. However, gasoline and distillates accounted for 88.5%, 86.2%, and 84.7% of their revenues in 2022, 2021, and 2020 respectively. In this comprehensive analysis, I will examine PBF's financial performance in relation to market conditions both past and future.
Financial Outlook
PBF is currently working on an ongoing renewable diesel project, with plans to establish a 20,000 bpd production facility. The company has partnered with Eni SpA to invest in the necessary facilities and infrastructure for renewable diesel operations, which are expected to begin in the first half of 2023. In 2022, PBF was able to take advantage of global supply disruptions and generate a significant cash balance. Despite the usual seasonal fluctuations in demand for gasoline and diesel, these effects were less impactful on PBF's operations during 2022 and 2021.As with many companies in the oil industry, refining costs for PBF are highly dependent on market conditions. While some refining firms have access to their own sources of crude oil production, PBF obtains its required crude oil and other feedstocks from unaffiliated sources. Therefore, it is important to assess whether the company has the ability to maintain its performance over the long term.
The surge in energy prices during 2022, caused by the war in Ukraine and other supply chain disruptions, had a significant impact on the industry. Despite this, PBF's financial performance remained stable , with the exception of the recent oil boom. As shown in Figure 1, the company generated $838 million and $933 million of operating cash flow in 2018 and 2019 respectively, with a substantial portion translating into free cash flow of $462 million and $538 million respectively. Following the downturn of 2020 and negative oil prices, PBF was able to recover successfully and reach $228 million of free cash flow at the end of 2021. While these results are not as encouraging as the previous year's FCF of approximately $4.1 billion, they demonstrate PBF's ability to perform even in challenging market conditions. The CEO noted that the chaotic market conditions of the past year provided potential opportunities for growth. As this chaos is expected to continue, PBF is focusing on improving the availability and productivity of their refineries to be prepared for upcoming opportunities. In Q1 2023, PBF continued to improve upon their benefits generated in 2022 by remaining focused on operations. As a result, they have generated over $4.5 billion of free cash flow in TTM.
Figure 1 – PBF’s free cash flow
Fortunately, the management was able to take advantage of the chaos in 2022 to significantly reduce their debt level from over $5 billion after the downturn in 2020, to $2.6 billion in 2022 and further down to $2.1 billion in the trailing twelve months. Their operations have generated enough cash flow to support further debt reduction, which is reflected in their improved leverage condition. In fact, since 2023, they have been able to reduce their debt by $525 million and pay a dividend of $0.20 per share. As a result, their leverage ratios have dropped significantly from 1.45x and 7.69x in 2021 to just 0.09x in 2022 for net debt to equity and net debt to cash operation, respectively. While it may not be sustainable for PBF's balance sheet strength to remain as strong as it was last year, it will certainly lead to shareholder returns going forward. (see Figure 2).
Figure 2 – PBF’s leverage condition
The refining industry's profitability is heavily influenced by the fluctuation of crude oil prices and the price differentials between various grades of crude oil. As a result, changes in crude oil and feedback stocks' costs can have a significant impact on profitability margins, which may not be immediately reflected in product prices. By examining PBF's margin ratios over the past five years, we can gain insight into how the company's profitability trend has evolved within the oil industry. Despite the unprecedented challenges of 2020, PBF's operating cash flow and net profit margins improved to 1.75% and 0.85%, respectively, in 2021. These ratios reached their highest levels ever in 2022, but lower oil prices in 2023 are expected to result in lower margins compared to the last year. Nevertheless, PBF is projected to remain profitable even at these lower levels (see Figure 3).
Figure 3 – PBF’s margin ratios
Market outlook
In the three months ended 31 March 2023, gasoline (and gasoline blendstocks) and distillates (and distillate blendstocks) accounted for 47% and 34% of PBF’s total throughput, respectively. According to EIA’s short-term energy outlook , U.S. motor gasoline consumption in 2023 is expected to be 100 thousand barrels per day higher than in 2022. However, U.S. distillate fuel oil consumption in 2023 is expected to be 10 thousand barrels lower than in 2022. However, despite higher gasoline consumption in 2023, during the summer of 2023 (April to September), retail gasoline prices are expected to average around $3.40 per gallon, 20% lower than in the summer of 2022. It is important to know that the average U.S. regular gasoline retail price in April 2023 was $3.60 per gallon, that is EIA’s estimation in April. As a result of relatively high inventory draws in April 2023, the U.S. gasoline inventories decreased to below the five-year average, making gasoline prices to increase. However, the positive effect of the lower gasoline inventories on gasoline prices can be entirely offset by the negative effect of lower crude oil prices. Overall, due to lower crude oil prices, and rising U.S. refinery runs, EIA expects in the Summer of 2023, the U.S. regular gasoline retail prices across all the regions to be lower than in the summer of 2022 (see Figure 4). Furthermore, diesel fuel prices in 2023 are expected to be 30% lower than in 2022 and decrease further in 2024. However, Figure 5 shows that U.S. diesel prices in 2023 and 2024 can remain higher than in 2020 and 2021. Also, U.S. gasoline prices in 2023 and 2024 are expected to remain higher than in 2020 and 2021. We can see that the changes in crude oil prices have been the main reason behind the changes in gasoline and diesel prices in the past five years. Thus, a significant change in the market condition as a result of geopolitical tensions can push oil prices higher, and increase gasoline and diesel prices again.
Figure 1 – U.S. regular retail gasoline prices
Figure 2 – U.S. gasoline, diesel, and crude oil prices
Conclusion
Recently, the energy sector has been experiencing a bullish trend, which has presented an opportunity for refinery companies to strengthen their balance sheets. PBF Energy is one such company that has benefited from this trend due to its management's efforts to reduce debt and improve leverage conditions over the past year. Furthermore, the company's ability to generate significant amounts of free cash flow positions it well to face any potential future challenges. In light of these factors, I believe that a buy rating is warranted for PBF Energy stock.
For further details see:
PBF Energy: Strong Financials Prioritize Shareholder Returns