Credit Suisse Is Less Optimistic On US Independent Refiners; Downgrades Calumet

Credit Suisse’s Edward Westlak said that the price targets for refiner MLPs has been reduced following the recent pullback in shares and implied higher cost of capital. He commented, “Refining is a cyclical business and should trade wider than long lived infrastructure businesses.”

Westlak expects summer grade gasoline margins to remain healthy, in view of the rising global gasoline demand. Margins typically begin improving in May. He added, “It is natural as the business cycle progresses to start getting concerned about a domestic recession and the risk of a China hard landing is real. However, we are still in the sluggish growth camp for 2016.”

Calumet Specialty Products

Westlak downgraded the rating for Calumet Specialty Products Partners, L.P CLMT from Outperform to Neutral, while slashing the price target from $32 to $18. The company reported a weak quarter and management has indicated a desire to focus on core specialties business and away from more commoditized pursuits.

“We applaud this effort, and believe that the name has become oversold in recent days, but flag that it could be a long road ahead before CLMT finds its business on a more stable footing, with balance sheet and dividend path risks not entirely shared by other names,” the analyst wrote.

CVR Refining

Credit Suisse maintained a Neutral rating for CVR Refining LP CVRR, while reducing the price target from $23 to $16. Although the company has been negatively impacted by the challenging macro environment, it faces fewer operational issues, since it will have no distribution in the current quarter.

CVR Refining is likely to report low earnings for 4Q15, and earnings pressure is expected to continue in 1Q16. “The Coffeyville refinery, CVRR's main moneymaker, has had an extended two part maintenance this winter,” Westlak mentioned.

Management indicated that the second phase of the turnaround would commence a week early and would last for about 30-35 days. The cost of this is estimated at around $35 million. Moreover, over this period, the refinery will be “running a lighter than normal crude slate, which could have an impact given how crude differentials have been trading,” the analyst added.

Alon USA Partners

Westlak maintained an Outperform rating for Alon USA Partners LP ALDW, while reducing the price target from $31 to $21. The price target had been reduced to reflect the market conditions as well as the company’s cost of equity, which has been weighted to reflect a 10 percent yield for logistics and a 13 percent yield for refining.

“However, we would highlight that this change does not reflect any change in earnings for ALDW, as they have yet to fully report,” the analyst pointed out.