Refining & Marketing
Slower Recovery, But Next
Move Likely Higher; In-Line
Initiating coverage of the US refiners with an In-Line
view. We expect 2009 to mark the trough in US gross
refining margins, followed by a slow recovery extending
into 2013. We believe investor sentiment will shift to
defining the extent and duration of the recovery as
demand growth marginally exceeds new capacity
growth. We assume a recovery in returns in US refining
in 2009–11, yet still below normalized as the global
refining system clears excess capacity.
Group likely to trade higher into year-end. Secular
headwinds are well known and consensus. However,
we see near-term upside potential for the group based
on: (1) a drawing down of record US distillate
inventories due to a seasonal uptick in demand, partial
restocking (both of tertiary distillate stocks and general
consumer goods), and economic recovery; (2) investors’
shifting focus to relative values in a “normalized” refining
environment (post-recovery), which has already
occurred in other commodity cyclical segments that
have materially rallied with high levels of “excess
capacity”; and (3) tighter supply as assets are
rationalized and projects canceled.
Normalized values provide support in a cyclical
trough as we expect near-term earnings to be
challenged, yet well telegraphed. The group is trading at
a 30–40% discount to normalized values (using our DCF
models). We expect the group to be a range-bound
trading group similar to the period of excess capacity in
the mid-to-late 1990s.
Overweight-rated SUN is our preferred play. We
believe SUN has the most near-term earnings support
and stability driven from non-refining business (75% of
its value), trades at highest discount to its NAV, has
medium-term catalysts to unlock value, primarily
operates in shorter cycle non-refining businesses
(earlier to recover), realize a lift in season Northeast
distillate demand.