Goldman's Pair Trade In Refining: CVR Energy Upgraded, PBF Energy Downgraded

Commenting on the US Energy industry, Goldman Sachs' Neil Mehta recommended to focus on companies with underappreciated retail value, robust capital allocation profiles or stocks with discounted sum-of-the-parts valuations. He commented on two rating changes.

PBF Energy

Analyst Mehta downgraded the rating on PBF Energy Inc PBF from Neutral to Sell, while reducing the price target from $23 to $19. He added that the price target reflected 12 percent downside potential versus the average upside of 4 percent for the GS refining coverage.

Mehta enumerated the reasons for the downgrade as:

1. Expectation of negative FCF generation, reflecting -6 percent 2016-2018 FCF yield. This translates to a long-term dividend reduction
2. Downside to guidance at the Chalmette and Torrance refining assets
3. Higher RINs exposure
4. Tough conditions in the East Coast refining market, with higher gasoline imports from Europe

CVR Energy

The analyst upgraded the rating on CVR Energy, Inc. CVI from Sell to Neutral, while raising the price target from $13 to $15. He mentioned that since being added to the GS Americas Sell List on November 18, 2014, CVR Energy’s shares had lost 70 percent, versus an 8 percent gain in the S&P and a 20 percent decline in the XLE.

Mehta attributed the company’s underperformance to:

1. Tightening of Brent-WTI differentials
2. Increase in RINs/Ethanol-related expenses
3. A reduction in capital allocation via suspension of special dividends and a reduction in the common dividend

“After the underperformance, we see risk/reward more balanced, especially given positive 2017/2018 FCF and an above-average dividend yield,” the analyst wrote.

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