« A tale of two conclusions on refining | Main | OPEC fears of biofuels realized »

June 7, 2007

A tale of two conclusions on refining

Wow, banks can totally disagree on the refinery complex. One says sell the peak has passed, the other says buy the train is leaving the station.

Lehman (the skeptic.)

Investment Conclusion:

  • We remain cautious about the refiners. We think crackspread has already peaked 2-3 weeks ago and will continue to trend lower in the coming weeks. In addition to the unfavorable seasonal trend, we think the global refining market will transition to a new multi-years cyclical down cycle in 2H07.

  • We think today's (6/7) DOE report was bearish for the petroleum complex with larger than expected build in products. This is especially true in gasoline where inventories rose by 3.5 million bls compared to the previous week despite a 104 mb/d fall in imports and 36 mb/d fall in production signaling weaker than expected demand. This is the 5th consecutive week when gasoline inventories have risen. We continue to think that refining margins will continue the downslide going forward with refineries gradually coming back onstream and weak demand growth.

  • For 2Q07, while refiners should report a record quarter in term of margin realization and earnings, results will likely be much lower than expected in comparison to the commonly used benchmark indicators.

  • 2Q07 results will be greatly impacted by the widening of crude differentials between WTI and all other grades.

  • Versus the commonly used benchmark such as WTI, upstream earnings will likely be stronger than expected because of the relatively depressed WTI pricing versus other grades of oil, both domestic as well as international grades.

  • Versus the commonly used benchmark such as 3-2-1 crackspread, downstream earnings will likely be substantially lower than expected, possibility by $6-8/barrel pre-tax or more, primarily due to (1) average refinery gasoline yield is much lower than the benchmark's implied yield of 67%, (2) depressed WTI pricing versus other grades of oil.

  • For the major integrated oil companies, the net effect will be a net negative since all majors process more oil in their refineries than they produce from the field.

    • Goldman (the opportunist)

    Refiners: Buy the dips 1. We continue to believe the US refiners represent the most attractive investment area across the broad Energy sector if not all of the stock market and we reiterate our Attractive coverage view. With the US refiners investors have the opportunity to invest in a group where: (1) consensus EPS estimates we think need to rise by roughly 50% for each of the next several years on margin assumptions roughly 50% below recent levels; (2) the sector is trading at a mid-single digit P/E at a time companies are buying back increasing amounts of stock and generating over 25% returns on capital; and (3) most Street analysts have downgraded the sector or otherwise continue to be cautious owing to an excessively pessimistic outlook at a time when refined project demand remains resilient, refining spare capacity is tight, unplanned downtime is secularly increasing, major Middle East new build projects have been delayed, and the near-term threat of rising ethanol capacity increasingly seems like a non-issue in terms of its impact on gasoline supply/demand.

    Posted by Martin at June 7, 2007 10:37 AM

    Trackback Pings

    TrackBack URL for this entry:
    http://www.nwventurevoice.com/cgi-bin/mt-tb.cgi/2781

    Comments

    Post a comment

    Thanks for signing in, . Now you can comment. (sign out)

    (If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)


    Remember me?