Citi Downgrades Refiners: What You Should Know

Earnings season for U.S. refiners is kicking off soon, and Citi Research analyst Faisel Khan recently previewed refiner earnings and downgraded several names in the space. Citi believes that narrowing differentials will continue to weigh on refiner margins in the near future.

The Numbers

Narrowing differentials have come as a result of the recent pipeline expansions and production slowdowns in the United States. Citi predicts that this environment will not change anytime soon.

The firm’s latest forecast calls for Brent-WTI differential of only $4.50/bbl, much lower than the previous forecast of $8/bbl. Citi is now calling for parity among LLS, ANS and Brent.

“On the flipside, we are increasing our gasoline margin assumptions by $2 per barrel and keep our distillate margins unchanged,” Khan added.

Related Link: Energy Excellence: It Could Be The Refiners ETF

M&A

Citi generally believes that independent refiners are quicker to pull the trigger on buying opportunities than major oil companies. The firm is positive on PBF Energy Inc (NYSE: PBF)’s acquisitions of the Torrance and Chalmette refineries.

Outlook

In the report, Citi downgraded the following refiners from Buy to Neutral:

• HollyFrontier Corp (NYSE: HFC)
• Western Refining, Inc. (NYSE: WNR)
• CVR Refining LP (NYSE: CVRR)
• Alon USA Partners LP (NYSE: ALDW)
• Northern Tier Energy LP (NYSE: NTI)

The firm maintains its Buy rating on these names:

• Phillips 66 (NYSE: PSX) (price target $88)
• Marathon Petroleum Corp (NYSE: MPC) (price target $70)
• Valero Energy Corporation (NYSE: VLO) (price target $74)
• PBF Energy (price target $48)

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

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