2014 Looking Good for Refiners: Valero, HollyFrontier, Tesoro

The reaction in all three stocks has been muted, but we would point that it is a second day of sharp selling in the broader markets. The team said:

2013 has cemented many of the changes that have redefined earnings over the past two years — namely rising US production, rising product exports and rising US refinery utilization. But it has consequences: in our view the recent rebound in crude spreads signals the early stages of crude saturation on the US Gulf Coast — and introduces a new layer of seasonal margin volatility that plays to the benefit of the sector.

What is interesting is that the very long report is full of conservative and cautious comments. Unfortunately, that means a lot of skipping over the fine print of what was a 30 page report. Still, prices were raise across the refining sector as far as target stock prices. That was true even for most peers not singled out here in the large research report.

On Tesoro Corp. (NYSE: TSO), the team believes that it can deliver greater overall incremental news from the upcoming analyst days anchored on a step up in acquisition
synergies. It also likes a West Coast crude advantage and accelerated spending at its MLP. The company has an analyst meeting on December 10 and we would note that the $75.00 price target implies close to 30% gains from the $57.35 recent price.

HollyFrontier Corp (NYSE: HFC) was raised to Buy and the price target was put at $60.00 versus a recent price of just under $49.00. Despite recent margin weakness, the team here thinks that it can maintain its $0.50 per quarter special dividend alongside a regular quarterly dividend of $0.30 per share. Its costs have also receded, leading the team to expect that refining earnings will rebound off recent lows.

Valero Energy Corp. (NYSE: VLO) was maintained as a Buy with a $59 price target, implying well over 25% upside from the $46.65 share price. Valero is the team’s top pick in the lot. It sees Valero poised to complete its second MLP with the pending IPO of Valero LP and the team thinks that Valero can unlock $5 to $9 per share of value in the stock.

Again, we would caution that there were many negative or concerning calls for refiners in 2014. Unexpected expenses hit the sector earlier in the year and the belief is that these are factored in now.