In comping Aramco to IOCs, we are most interested in ex-commodity elements that influence cash available to Aramco shareholders, including costs, realizations, production mix, taxes, and royalties (has the term “Royalty Payment” ever been used more literally in an oil & gas prospectus?). Putting it all together, Aramco will clearly be a defensive stock within the oil cycle, not only due to fiscal elements that narrow the range of CF but also due to a relatively simple and transparent business structure compared to other IOCs. As we see oil price tailwinds from slowing US production and IMO 2020 related demand, we favor a more offensive skew and do not see existing IOCs as a source of funds for Aramco but note that the defensive characteristics are likely to appeal to many energy investors.
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In this month’s Product Pulse we’ll discuss gasoline. The positive impact of IMO 2020 on distillate margins are well understood, but during 3Q earnings season refining management teams also expressed a constructive view on gasoline margins, as IMO 2020 could inflate the value of all low sulfur products for both obvious and esoteric reasons. Quarter to date, WTI and LLS based gasoline cracks are up 68% and Infinity percent, respectively, over 4Q18. (4Q18 saw negative LLS-based gasoline cracks). Versus the 4Q 2015-2018 average, which includes the 2017 Hurricane Harvey driven spike, WTI and LLS based gasoline cracks are up 31% and 35% QTD, respectively.
PSX carried high expectations into its Analyst Day and provided an illustrative earnings framework that is growing rapidly (~$9B of LTM EBITDA translates to $11B in 2022 under equivalent cycle conditions). A lot of topics were addressed, but we’ll focus on the ones that keep PSX Outperform rated and among our top picks across sectors: Midstream/Refining integration and ongoing operating/performance enhancement.
DK reported 3Q adjusted EPS of $0.78, beating both our $0.74 and consensus’ $0.68 estimates. Despite downtime, El Dorado throughput was stronger than we expected, but margins disappointed. However, the work done on the vacuum tower there should allow for a 4% increase in the refinery’s distillate yield. Krotz Springs’ margins were better than expected and Retail contribution margin was also above our estimate on stronger fuel margins. CFFO before WC changes was $133MM, above our number, with working capital adding another $80MM benefit in the quarter. Lastly, DK bought back 1.2MM shares for $43MM in the quarter and expects to repurchase another $30MM in 4Q.
Underlying figures and additional commentary inside. Overall takeaways are neutral. Our crude inventory build is above consensus’ and Other Swing exports have moved higher, though the downward revisions to Asia-bound exports and lower overall October exports from AG-OPEC are an offset.
This week, 5/10 Commodity Drivers We Care About are improved over last week. Product markets on the West Coast firmed again, bringing a positive direction to SJV cracks, West Coast Naphtha upgrading, and West Coast octane values. Conversely, multiple spreads in the Gulf Coast are contracting on normal seasonal patterns, including GC diesel cracks and Butane blending spreads. Even with this contraction, 4Q earnings dynamics appear stronger than consensus as some reversion was already baked in.
As the Aramco IPO launches for a planned December listing, media reports indicate the target valuation has been brought lower by up to $0.5T. Reports indicate syndicate members advertising valuations in the $1.2T-$2.2T range (A trillion dollar range. Being a banker sounds fun). These reports, together with the launch of the process and publication of 3Q19 Aramco earnings occasion us to re-examine how Aramco competes with our existing IOCs, as the IPO could arguably pose a cannibalization risk for the space. We maintain the view that IOCs compare more favorably than expected vs Aramco in terms of cash available to shareholders.
CVX reported adjusted 3Q19 EPS of $1.55 (ex-items), beating our $1.49 largely on Upstream volumes. $6.4B CFFO, $3.5B cash capex, and the upsized $1.25B buyback were all in line. The focus was not earnigs, however, but disclosure of 25% cost overrun at the Tengiz expansion project, totaling a $9B gross overrun. The impact to total spending and implications for execution of future projects were litigated on the call, with our conclusion that the excess cost is absorbed by CVX’s stated capex range. Bottom line: the return profile of Tengiz expansion is moderately impaired by the excess cost, but the stock which previously was a conventional value/quality story now has a catalyst: beating capex next year.
XOM reported adjusted EPS of $0.68, in line with consensus’ and our $0.67 estimates. More importantly, XOM generated $8.1B of CFFO before working capital changes, stronger than our $7.6B estimate. PP&E additions of $6.6B plus the dividend outlay of $3.7B resulted in a cash burn of $2.2B before debt and working capital changes, beating our expectation of $3.5B, driven by both the CFFO beat and lighter capex.
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