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Large investors flee US oil refining sector in Q1

Large institutional investors fled U.S. refining equities during the first quarter as the COVID-19 pandemic took hold during March. But as some reduced their exposure to the sector, others sought to take advantage of a potential rebound in petroleum markets.

State Street Global Advisors Inc. was among the top buyer of four refining stocks as it bought a net 900,000 shares of HollyFrontier Corp., 700,000 shares of Delek US Holdings Inc., 1.8 million shares of Valero Energy Corp. and 1.7 million shares of Phillips 66. BlackRock Inc. increased its holdings in Valero and Phillips 66 by 1.6 million shares and 1.2 million shares, respectively.

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Ahead of first-quarter earnings season, analysts cut price targets and earnings estimates for the group as stay-at-home orders drove gasoline margins to negative levels. Despite an unprecedented decline in gasoline demand, some members of the group beat Wall Street expectations. But the sector still faces challenges as the world begins to move past the pandemic. Refiners, who are wary of ramping production higher too early, expect to run their plants at minimum levels during the second quarter and are keeping an eye on rising distillate inventories, which are a consequence of the industry response to the concurrent collapse in gasoline and jet fuel demand.

To weather the COVID-19 downturn, the industry has slashed capital spending, cut expenses, deferred maintenance, and issued debt in order to boost liquidity. During first-quarter earnings calls, only Delek executives said the company plans to ramp crude oil processing higher in the second quarter. As for strategy, Marathon Petroleum Corp., which plans to spin off Speedway, its convenience store chain with approximately 4,000 fueling stations, is scrutinizing its other assets with a new CEO at the helm. CVR Energy Inc. and HollyFrontier executives discussed the potential for growth through acquisitions, with CVR Energy CEO David Lamp expressing that scale and diversification are key to surviving a post-COVID-19 market. For their part, Valero executives said they would not depart from the company's long-term financial strategy because of COVID-19.