Are Independent Refiners Still Competitive?
Despite a difficult market, their advantages are intact.
The refining market remains in recovery following what is likely to be the trough in refined product demand in the second quarter. Demand has begun to recover, although the future pace is in question as infections continue to spread, potentially slowing the economic recovery. As such, refiners will probably have to maintain utilization discipline through at least the remainder of the year, with most management teams not expecting a return to average inventory levels until the middle of next year. Investors should expect poor earnings until then as margins are likely to remain weak. However, predicting short-term margin and crude differential movements is a waste of time. Given the unpredictability of near-term macro conditions, we think the more important question for investors is: Will refiners retain their long-term advantages, or will there be any post-pandemic structural changes that negate them? We don’t think the latter will happen, but all competitive positions aren’t equal.
Given that all refiners appear relatively cheap, we’d lean toward quality, which means we prefer Valero Energy (VLO). A rising tide of improved product demand, lower inventory levels, and higher margins will lift all boats, but as a pure-play refiner with the highest-quality assets, Valero stands to benefit while offering protection if the difficult environment persists longer than expected.
Allen Good does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.