Oil refining stocks have had an auspicious start to the year as they have outperformed the broader market, with the S&P 500 Oil & Gas Refining & Marketing Index climbing 9.07% versus 2.55% for the S&P 500.
After demand collapsed in the spring of 2020 from lockdowns meant to contain COVID-19, petroleum stockpiles ballooned, and the glut weighed on the market for much of the year. But with the advent of the new year, gasoline stockpiles finally fell more in line with the five-year average. Through Jan. 8, U.S. gasoline stockpiles are 2.9 million barrels below the five-year average, while the distillate market has worked off nearly three quarters of the 39.8-million barrel surplus to the five-year average of early June 2020. As of Jan. 8, distillate stockpiles stood 10.4 million barrels above the five-year average.
Tudor Pickering Holt & Co. analysts noted Jan. 21 that indicative profitability for refining gasoline and diesel based on 2021 futures prices has climbed by $3 per barrel and $5/b, respectively, over the last three months, with inventories driving the trend for gasoline and "encouraging trends in demand" driving the improvement for distillate.
But the biofuel market brings a layer of uncertainty to the outlook for the industry.
"Of course, the big headwind is RINs, as the combination of low ethanol/biodiesel inventories, rising corn/soybean feedstock costs, and expectations of a renewables push from the Biden administration has sent D6 and D4 RINs back to 2017 levels," the analysts wrote. "For a refinery that cannot blend on its own, we estimate current RIN costs stand at $2.55[/b], up meaningfully from $1.92 in Q4'20, and 82 [cents/b] in Q1'20."
Of the large cap stocks, Marathon Petroleum Corp. has outperformed both Phillips 66 and Valero Energy Corp.
In a Jan. 18 report, Goldman Sachs attributed Marathon's higher relative performance to the pending sale of its Speedway retail gasoline business to 7-Eleven Inc., an indirect, wholly owned subsidiary of Seven & i Holdings Co. Ltd.
Marathon anticipates the deal will net the oil refiner $16.5 billion in cash after taxes upon its close in the first quarter. Some of that cash will go toward retiring debt and increasing the company's cash balance, while the rest would be directed to shareholders.
"While [Valero] and [Phillips 66] appear on track to sustain the dividends, there is some investor concern around leverage acquired during the downcycle, limiting capital returns," the Goldman Sachs analysts wrote.
The analysts said some investors expect to benefit from growth in renewable diesel demand. "For [Delek US Holdings Inc.], some investors see upside option value from assets in Bakersfield and the potential for conversion to renewable diesel assets," the analysts wrote. "For [CVR Energy Inc.], the 2H2021/2022 cash flow from Wynnewood (and eventually Coffeyville) is creating some optimism that CVR can meaningfully shift the business model, resulting in multiple expansion."
CVR Energy, whose board approved plans to convert a portion of its 74,500-b/d refinery in Wynnewood, Okla., and its 132,000-b/d refinery in Coffeyville, Kan., to renewable diesel production, is also pushing for board and strategy changes at its rival, Delek. Analysts have viewed CVR's activist push as positive for both company stocks.