Refiners: It’s Not Just Oil Exports

After bouncing back yesterday from their oil-export related losses, refiners like Marathon Petroleum (MPC), HollyFrontier (HFC), Tesoro (TSO) and Delek US (DK) are falling once again.

And while it’s easy to blame the decision to allow exports of ultra-light crude oil, Credit Suisse analysts Edward Westlake and Bryan Baritot explain why there’s more to the drop in refiners–and their decision to cut Holly Frontier:

Bloomberg News

2014 has been a year of consolidation in refiner shares. The US refiners sit at the low end of the global cost curve, have value in logistics and retail, have demonstrated the ability to generate significant cash flow when crude markets dislocate, and US production (even ex-condensate) is rising at 800-900kbd pa. However, the market has been reminded that US refining is still linked to the world – the US imports 7.4 MBD of crude (4.7 mbd ex-Canada), there is over-capacity in global refining and the risk premium in the oil price is rising. Leading edge consensus EPS for 2Q started to fall a few weeks back – we cut our earnings today. This week the market was also reminded that the lightest barrels (condensate) in US production can be exported (via distillation towers) at relatively low cost, creating more runway for black oil (now stands at maybe over 4 years). In addition to lowering EPS (see Exhibit 10) for the group, we downgrade Holly Frontier back to Neutral, as we expect macro fears to side-swipe its operational recovery.

Westlake and Baritot also worry about Tesoro, which “needs to beat convincingly in 2Q earnings…to drive furtehr relative upside.” They recommend Marathon Petroleum “is becoming significantly more interesting after underperforming,” they say, while they “see most potential in niche refiners,” like Delek US Holdings and Western Refining (WNR).

Shares of Holly Frontier have dropped 2.2% to $44.48 at 2:58 p.m., while Marathon Petroleum has fallen 1.4% to $79.77, Tesoro has decline 0.7% to $59.51, Delek US has slid 3.5% to $28.67 and Western Refining is off 1% at $38.26.

And as a final note, I recommended HollyFrontier in this May column. It’s down 8.4% since then.