In recent quarters, fuel margins for companies in the Zacks Oil and Gas - Refining & Marketing industry have declined, falling significantly below the peak levels seen in 2022. Although strong demand and light product inventories should continue to support the sector, most operators anticipate subdued margins for the remainder of 2024. Additionally, rising costs due to persistent inflation are further squeezing profits. But on a somewhat positive note, the refiners are likely to benefit from robust gasoline and distillate demand trends. For those interested in the space, we have earmarked three stocks — Valero Energy VLO, Murphy USA MUSA and Galp Energia GLPEY.
Industry Overview
The Zacks Oil and Gas - Refining & Marketing industry consists of companies involved in selling refined petroleum products (including heating oil, gasoline, jet fuel, residual oil, etc.) and a plethora of non-energy materials (like asphalt, road salt, clay and gypsum). Some companies also operate refined product terminals, storage facilities and transportation services. The primary activity of these firms involves buying crude/other feedstocks and processing them into a wide variety of refined products. Refining margins are extremely volatile and generally reflect the state of petroleum product inventories, demand for refined products, imports, regional differences and capacity utilization in the industry. Other major determinants of refining profitability are the light/heavy and sweet/sour spreads. Refiners are also prone to unplanned outages.
3 Trends Defining the Oil and Gas - Refining & Marketing Industry's Future
Refining Margins Under Pressure: Refining margins, while still healthy, have weakened from the exceptional highs of 2022, with crack spreads narrowing due to lower refined product prices relative to crude oil. Elevated inventories and demand uncertainties pose additional risks to profitability. Despite sanctions and price controls, Russia's shift of oil exports to India and China has prevented the anticipated tightening of global product supplies. This dynamic has contributed to the recent decline in refinery margins, weighing on the earnings of downstream companies.
Refiners Poised for Growth Amid Rising Product Demand: Recently, refiners have benefited from strong demand for gasoline and diesel, driven by strength in travel and mobility. According to the U.S. Energy Department, gasoline inventories are slightly below the five-year average and distillate stocks are 9% lower, indicating robust market utilization. This highlights the significant usage of oil products. As economic activity remains resilient and Americans engage in travel, consumption of refined products is expected to gain momentum throughout 2024, benefiting refiners from increased driving and international travel trends.
Supply-Chain Challenges: Despite the relatively bullish energy landscape and improved demand environment, the industry has not been immune to supply-chain disruptions and cost inflation. Macro issues like higher transportation expenses, driver scarcity and labor shortages have limited refiners' ability to deliver volumes to their customers. What’s worse is that these headwinds across the system and the subsequent hit to profitability (due to difficulty in passing through the increased costs to clients) are expected to continue in the near future.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas - Refining & Marketing is a 15-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #205, which places it in the bottom 18% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are becoming pessimistic about this group’s earnings growth potential. As a matter of fact, while the industry’s earnings estimate for 2024 has gone down 20.9% in the past year, the same for 2025 has fallen 8.6% over the same timeframe.
Despite the dim near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Underperforms Sector & S&P 500
The Zacks Oil and Gas - Refining & Marketing industry has fared worse than the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry has gone down 2.9% over this period compared with the broader sector’s decrease of 2.6%. Meanwhile, the S&P 500 has gained 27.5%.
One-Year Price Performance
Industry's Current Valuation
Since oil and gas companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of noncash expenses.
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 3.55X, significantly lower than the S&P 500’s 18.90X. However, it is above the sector’s trailing 12-month EV/EBITDA of 3.09X.
Over the past five years, the industry has traded as high as 6.76X and as low as 1.84X, with a median of 3.67X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Stocks in Focus
Galp Energia: It is a Portuguese integrated energy firm with a significant presence in the downstream segment. The company’s Refining and Marketing unit is responsible for the supply and trade of oil and biofuels, and the operation of oil and gas refineries. It operates two refineries in Portugal.
GLPEY, based in Lisbon, has a four-quarter average earnings surprise of 64.3%. The firm has a market capitalization of $14.5 billion. This Zacks Rank #2 (Buy) company’s shares have gained 26.6% in a year.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: GLPEY
Valero Energy: San Antonio, TX-based Valero Energy is the largest independent refiner and marketer of petroleum products in the United States. The company has a refining capacity of 3.2 million barrels per day across 15 refineries located throughout the United States, Canada and the United Kingdom.
VLO’s expected EPS growth rate for three to five years is currently 4%, which compares favorably with the industry's growth rate of 3.9%. Valero Energy beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 11.5%. Shares of this Zacks Rank #3 (Hold) company have lost 4.4% in a year.
Price and Consensus: VLO
Murphy USA: It is a leading independent retailer of motor fuel and convenience merchandise in the United States. The proximity of Murphy USA’s fuel stations to Walmart supercenters helps the company leverage the strong and consistent traffic that these stores attract. MUSA’s acquisition of QuickChek Corporation — a family-owned food and beverage chain — is expected to help improve its offerings.
El Dorado, AR-based Murphy USA has a market capitalization of $10.8 billion. MUSA beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters and missed in the other. The company carries a Zacks Rank of 3. Shares of MUSA have gained 50.9% in a year.
Price and Consensus: MUSA
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