Dropping crude oil prices recently have had a large impact on the oil and gas sector, resulting in falling share prices for major oil companies. However, there is a silver lining for the refinery companies or major oil companies that operate with an integrated model. Refineries function more efficiently with cheaper oil prices, seemingly acting as a buffer from the negative impact of lower crude oil prices. The point being that companies can get support in the short term from these downstream earnings.

Merrill Lynch’s Doug Leggate and Jason Smith said as recently as December 4:

With crude spreads that have collapsed with oil prices, we believe optimism on the sector is premature. In our view, we see lower absolute oil prices translating into lower absolute margins for the refiners. Looking beyond the hedge to the collapse in the E&P sector, we remain cautious on the absolute valuations in the sector.

However, these refinery firms have not been behaving as expected.

The analyst firm Tudor Pickering initiated coverage of Marathon Petroleum Corp. (NYSE: MPC) with a Buy rating on December 4. Shares of Marathon were down over 4% at $84.74 in the final hour of trading Wednesday. The stock has a consensus analyst price target of $109.91 and a 52-week trading range of $74.64 to $97.94.

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Tudor Pickering also initiated coverage of Valero Energy Corp. (NYSE: VLO) with a Buy rating on December 4. Shares of Valero were down about 4% at $46.69 in the final hour of trading Wednesday. The stock has a consensus analyst price target of $64.00 and a 52-week trading range of $42.53 to $59.69.

In mid-November Credit Suisse upgraded Phillips 66 (NYSE: PSX) to an Outperform rating from a Neutral rating and moved its price target up to $95.00. Shares of Phillips were down over 2% at $67.12 in the final hour of trading on Wednesday. The stock has a consensus analyst price target of $92.71 and a 52-week trading range of $66.12 to $87.98.

Finally, Tudor Pickering initiated coverage of Tesoro Corp. (NYSE: TSO) with a Buy rating on December 4. Credit Suisse also weighed in on the company, maintaining an Outperform rating and raising its target price to $100 from $86. Shares of Tesoro were down almost 4% at $73.99 in the final hour of trading Wednesday. The stock has a consensus analyst price target of $85.00 and a 52-week trading range of $46.40 to $79.49.

Looking at Tesoro, Credit Suisse suggests that it is possible for the company to generate over $2.8 billion in EBITDA, even with weaker margins. The 2016 consensus estimate was $2.3 billion and the analyst firm believes that $3 billion of 2017 EBITDA looks achievable at a WTI-Brent spread of $5 per barrel and weaker mid-cycle California refining margins. As a result, Credit Suisse adjusted its earnings per share estimates for Tesoro for the following years:

• 2014: raised to $6.94 from $6.42
• 2015: raised to $7.97 from $6.29
• 2016: raised to $7.36 from $6.63

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