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Investors return to US refiners in Q3, with BlackRock placing big bets

Large institutional investors were net buyers of U.S. oil refining stocks in the third quarter, despite the challenges the industry continues to face from the coronavirus pandemic.

While investors generally preferred large-cap companies with investment-grade debt, BlackRock Inc. bucked that trend. The investment manager was among the top buyers of four oil refining stocks in the third quarter as it continued to juggle its U.S. refining holdings.

BlackRock purchased 4.7 million shares of PBF Energy Inc., expanding its stake in the company to just over 14% of shares outstanding. It also bought 500,000 shares of CVR Energy Inc. and 1.9 million shares of Delek US Holdings Inc.

Citing challenging petroleum markets, PBF Energy, CVR Energy and Delek have each suspended their quarterly dividends. But in contrast with CVR Energy and Delek executives, PBF executives spent much of the company's third-quarter earnings call defending the company's liquidity position through the current crisis after yields on its debt skyrocketed.

At the end of the third quarter, executives said PBF had about $2 billion in liquidity, including $700 million of borrowing capacity under its revolving credit facility and $1.3 billion in cash and equivalents. But they warned the company would burn through up to $100 million in cash per month over the six to nine months that followed the company's Oct. 29 earnings call. An effort to reconfigure its East Coast refining assets could lower that rate to between $50 million and $75 million per month by the first quarter, they added.

By contrast, CVR Energy executives are weighing plans to convert some of the company's refining capacity to renewable diesel production, projects that would allow the company to pivot back to oil refining if market conditions were favorable. Executives expressed the desire to expand the company's refining footprint to the Mountain West market through acquisitions.

Delek executives discussed cost and capital spending reductions and in outlining priorities, they said the company would prioritize share repurchases over dividends as long as the company's stock price remains low.

BlackRock also acquired 3.4 million shares of Marathon Petroleum Corp. in the third quarter, increasing its stake in the integrated refining company to almost 11.3%. Marathon expects $16.5 billion in net proceeds from the pending sale of its Speedway convenience store business, a substantial portion of which it plans to return to shareholders. But paying down debt is a competing use of that cash, and Marathon's executives are still weighing how much of and in what form that cash would be returned to shareholders.

In the third quarter, BlackRock continued to pare its stake in HollyFrontier Corp. The refining and lubricants company is betting on renewable diesel projects to generate the cash necessary to sustain its dividend in the future.

Investors flocked to Valero Energy Corp., buying a net total of 6 million shares. Of the buyers, Vanguard Group Inc. purchased the second-most shares in the quarter to increase its stake to almost 10.1%. During the company's third-quarter earnings call, Valero executives called the COVID-19 pandemic an "isolated event" that would not steer the company from its long-term strategy.

Vanguard also increased its total stake in Phillips 66 to roughly 10.2%. The refining and chemical company's CEO said Oct. 30 the company remains "committed" to dividend growth through the market downturn.

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