Goldman Is Selling Phillips 66, Buying These Refinery Stocks

• Refiner stocks have outperformed the energy sector and the S&P 500 by a wide margin this year.
• Goldman believes that elevated share prices now make stock picking critical when it comes to refiners.
• Goldman still sees positive catalysts ahead for top refiner stocks in 2016.

While the rest of the oil & gas space has endured a miserable 2015, refiner stocks have been soaring. But will 2016 produce more of the same, or is not the time for refiner investors to be cashing in?

In a new report, Goldman Sachs analyst Neil Mehta Discusses which refiners Goldman is selling and which ones the firm still likes.

Risk/reward
Despite the 15 percent decline in the Energy Select Sector SPDR XLE in 2015 and only about a 3.0 percent gain by the S&P 500, refiners as a group are up a whopping 32 percent this year. At current elevated prices, Goldman believes that stock picking is now critical.

“While we continue to believe refiners will benefit from strong gasoline demand, capital returns to shareholders and favorable capture rates due to low oil prices, we are more concerned about tighter inland crude differentials, MLP-related upside and potential oversupply in the diesel markets,” Mehta adds.

3 investment themes
Morgan Stanley is recommending three themes when it comes to refiner stocks:
1. Favor coastal refiners over Mid-Continent.
2. Avoid stocks that trade at a premium to sum-of-the-parts valuation.
3. Buy free cash flow growth stocks.

Stock picks
In the report, Goldman upgraded PBF Energy Inc PBF from Neutral to Buy and downgraded Phillips 66 PSX from Neutral to Sell.

Goldman named Valero Energy Corporation VLO its top stock pick in the space but also likes Marathon Petroleum Corp MPC and Delek US Holdings, Inc. DK.

Disclosure: the author holds no position in the stocks mentioned.