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While investor sentiment seems focused on weak gasoline margins from 1Q, and even potential risk to 2Q19 refiner estimates as a result of a perceived massive gasoline supply overhang, we note that current 2-1-1 crack spreads across multiple regions are close to or above year ago levels. On 4Q18 conference calls, refining managements near-universally predicted refined product oversupply to clear up as maintenance season progressed and seasonal demand accelerated. Those predictions have played out, and we believe refining stocks can maintain momentum as sentiment for 2Q improves. See inside this note for charts of y/y 2-1-1 crack spread performance for various crude grades and regional refined products since the beginning of 4Q18. All quotes below are as of 3/18/19 close. Reiterate Outperform on PSX, MPC, DK, and recently upgraded VLO.
We are moving this weekly to Tuesdays at noon to improve EIA preview accuracy and because there was no significance to Mondays with respect to international data. Since the inception of this EIA forecast, the WR estimate has been closer to EIA actuals vs consensus 7 of 13 weeks. Generally, we believe the OPEC data has been more predictive of oil price direction than EIA trends, but we believe the EIA forecast adds nuance to the global supply/demand picture.
NFE hosted a business update call this morning (03/18/19). We believe the call was positive and are leaving our base case 4MM gal/day by 2021 unchanged, driving a $20 valuation. The stripped down 2.5MM gal/day, no liquefier case ($240MM annual CF) the company presented to illustrate earnings power with no incremental commercial developments helps in understanding a fully burdened downside scenario, but its not a driver for our assumptions and we’re still using 4MM gal/day of LNG terminal sales (supporting a 3.5MM gal/day liquefier) as a Phase 1 base case, with upside from there as the company converts on 14.4MM gal/day of potential volumes in the pipeline.
We cannot recall another refining stock with 100% sell-side Buy/Outperform ratings, so MPC’s ~10% underperformance large cap peers over the past month could be a simple case of near-term interference around a consensus call. In our view, MPC deserves its consensus status, but short-term underperformance can be expected for as long as the commodity exposure ANDV brought into the asset base continues to lag.
At a management meeting hosted by RDS yesterday updating its Integrated Gas and New Energies segments (see note HERE), we gleaned a positive takeaway for refining: with respect to IMO 2020 implementation, sulfur scrubbers on vessels may not be a long term solution, as units produce waste with no current disposal outlet, and could be a net negative for the environment. The comment referred to the growing LNG-for-maritime-fuel market, however the nearer term implication could be lower than expected fuel oil demand post-IMO 2020, supporting the outlook for distillate margins and light/heavy crude differentials.
Reports persist that RDS is evaluating a major Permian acquisition, specifically private company Endeavor, which owns ~300k Midland basin acres. This week, management commentary confirmed earlier reports of the company’s desire to acquire Permian assets, although targets were not specified. With respect to Endeavor, the BHP L48 unconventional sale process is instructive, as media reports pointed to BP as the likely winning bid several weeks before the acquisition was announced.
RDS put on a small meeting hosted by Maarten Wetselaar, Director of Integrated Gas (LNG) and New Energies. The meeting contained both revelations about LNG and power markets and RDS’s strategy to optimize them, as well as confirmation of observations from last week’s XOM and CVX analyst days. Full notes are published inside.
The most common inbound question off our Thursday night refining sector upgrade (linked HERE): What is historical sector performance immediately following positive inflections in gasoline crack spreads off <$0 lows? For reference, the question relates to our analysis of 6 and 12-month performance off <$0 gasoline crack spread instances, which has occurred 3 times since the financial crisis (we include a 4th cycle in 2016, when RINs adjusted gasoline cracks bottomed at <$3/bbl that September). The answer: for the first month following the end of $0/bbl gasoline cracks, the refining sector averaged 8% gains.
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