Market Overview

Valero, PBF Energy Among Morgan Stanley's Best Refining Ideas This Year

  • Shares of Valero Energy Corporation (NYSE: VLO) and PBF Energy Inc (NYSE: PBF) have lost 5 percent over the last 5 trading days.
  • Morgan Stanley's Evan Calio maintained an Overweight rating for Valero, while raising the rating for PBF Energy to Overweight.
  • Calio expects refiners to continue to lead energy, backed by EPS revisions, expectations of an extended refining cycle and robust cash returns.

“Refining pure-plays and high complexity coastal refiners to drive the best EPS revisions in 2016,” Evan Calio wrote, while citing Valero and PBF Energy as the top picks. He expects refined product demand to exceed new capacity in 2016, and believes that a significant decline in global growth would be required for there to be negative revisions.

In 2015, refiners outperformed Energy by 40 percent and the S&P by 17 percent. Calio expects refiners to outperform in 2016, driven by “positive earnings revisions from base crack spreads that drive higher-than-consensus cash returns.” Apart from favorable macro conditions, including lower oil price, sector M&A should also act as a near- term catalyst.

Morgan Stanley raised the price target for Valero from $90 to $100, while maintaining the price target for PBF Energy at $49.

Calio maintained Overweight ratings for Marathon Petroleum Corp (NYSE: MPC) and Phillips 66 (NYSE: PSX). While the price target for Marathon Petroleum was reduced from $85 to $65, that for Phillips 66 was maintained at $105. He said these stocks had “defensive downside characteristics (vs. broader energy)” in view of their shareholder returns, earnings achievability and significant exposure to any commodity recovery.

The analyst expects multiple based valuation to be “the primary valuation tool” in 2016, with sum-of-parts valuations unlikely until there is “a commodity recovery and concomitant MLP market reopening.”

“MPC and PSX have the most value uplift potential under a sum-of-parts valuation given the relative size on Chemicals and Midstream asset base,” Calio wrote.

Latest Ratings for VLO

Jun 2019UpgradesNeutralBuy
May 2019UpgradesNeutralOverweight
Apr 2019MaintainsOutperformOutperform

View More Analyst Ratings for VLO
View the Latest Analyst Ratings

Posted-In: Evan CalioAnalyst Color Long Ideas Upgrades Price Target Reiteration Analyst Ratings Trading Ideas


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