Credit Suisse On US Refiners: Downgrades Valero, Alon, Calumet, Northern Tier

US independent refiners reported weak 1Q earnings. Credit Suisse’s Edward Westlake mentioned that tight butane blending spreads and stock specific maintenance are expected to have a negative impact on the already weak performance of US independent refiners in 2016.

Analyst Edward Westlake expressed concern regarding deterioration of diesel margins. He added that global IP was weak, inventories high and diesel oriented capacity had expanded.

Apart from the end of seasonal trade, the biggest reason to sell refiner holdings this summer is the increasing likelihood of recession, Westlake mentioned. He further noted, “We believe this is not a 2016 event. However, recession risks rise into 2017 and more so in 2018.”

Valero Energy

Westlake downgraded the rating for Valero Energy Corporation VLO from Outperform to Neutral, citing relative valuation. He named the company as a “sector bellwether.”

“2016 and 2017 were always going to be a complicated footrace between rising recession risks, a strong case for summer gasoline, and the chance that oil prices (and hence upstream levered sectors) would start to rise,” the analyst wrote. He added that diesel continued to look weaker than expected and takes the shine off gasoline fundamentals.

Management has a good track record of delivering projects, maintaining capital discipline and remaining committed to sharing excess cash flows with investors.

Other Rating Changes

The analyst downgraded the ratings for Alon USA Partners LP ALDW and Northern Tier Energy LP NTI from Outperform to Neutral. The price target for Alon USA Partners was reduced from $21 to $13, while that for Northern Tier Energy was lowered from $30 to $24.

Westlake downgraded the rating for Calumet Specialty Products Partners, L.P CLMT from Outperform to Underperform, while reducing the price target from $32 to $11.

“Today, we are enjoying a cyclical rally in gasoline demand, driven by the rising wages of global consumers, both here and overseas, and helped by a collapse in pump prices. As these cyclical factors ebb, then auto efficiency gains may start to flatten gasoline demand later this decade or early in the next,” the Credit Suisse report stated.