Time To Get Into Refiners, BoA Says

BoA Merrill Lynch’s Doug Leggate mentioned that the stocks of most US refiners are currently trading significantly below their mid-cycle valuations, while companies are likely heading into another strong US gasoline season.

Following the pullback over the past few months, valuation gaps offer near term opportunities, analyst Doug Leggate said. He further commented that it seemed appropriate to “adopt a more constructive outlook” now, with margins normalizing higher, although the 1Q16 reporting season is likely to be tough.

Leggate upgraded the rating for Marathon Petroleum Corp MPC from Neutral to Buy, with a price objective of $50. He believes the MLP overhang on Marathon Petroleum’s shares is “overdone.” The company indicated that it would do what needs to be done to support MPLX LP MPLX because it is optimistic about the long-term growth opportunities of that business.

Leggate upgraded the rating for Tesoro Corporation TSO from Neutral to Buy, with a price objective of $116. “As the most exposed refiner to seasonal West Coast trends we similarly anticipate that once winter margin weakness subsides, TSO likely follows summer margin strength higher. Furthermore, the scale of EBITDA growth through operational improvements, synergies, and retail is a differentiating factor in our view,” the analyst wrote.

BofA Merrill Lynch upgraded the ratings for Valero Energy Corporation VLO and PBF Energy Inc PBF from Underperform to Neutral. The price objectives are at $78 and $34, respectively. Leggate mentioned that while these two stocks have the least potential upside, they would be supported because “a rising tide lifts all boats.”

“We continue to view refiners as a volatile sector, where momentum follows margin trends. From here we believe the balance of risk has moved in favor of short term rebound and accordingly we close out our successful counter consensus negative view,” the analyst commented.