The U.S. refiners, rather than E&Ps, is where there is the “greatest potential for continued absolute outperformance,” according to BofA Securities.
The Oil & Gas Analyst: Doug Leggate named Valero Energy Corporation VLO as the top pick among refining stocks.
The Oil & Gas Thesis: The price structure of oil is now “a steeply backwardated oil curve,” which indicates that for most U.S. oil companies, “valuation is dominated by $70, not $110 and has left momentum beyond absolute valuations for the U.S. E&Ps stalled,” Leggate said in the note.
He added the momentum has shifted “to oil services as equipment scarcity drives pricing power across the supply chain, and specifically to the U.S. refiners where we see the potential for a structural reset in mid-cycle earnings power of the sector.”
“We expect both of these trends to be apparent with upcoming earnings where preliminary discussions with multiple E&Ps suggest 2022 inflationary pressures are building beyond what was expected when capex budgets were set at the start of the year,” the analyst wrote.
“With gasoline and distillate draws this week and SPR led build of crude oil, we suggest the stage is set for a multi-year reset in refinery valuations — once an extraordinarily messy 1Q22 earnings season is out of the way,” Leggate further mentioned.
According to Benzinga Pro, SPDR S&P Oil & Gas Exploration & Production ETF XOP had risen by 0.60% to $143.44, while VanEck Oil Refiners ETF CRAK had shed 0.13% to reach $30.71 at of publication Thursday afternoon.
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