Phillips 66 (PSX), Marathon Petroleum Corp (MPC): Refiners Still Cheap

It was a rough April for the refiners. At the beginning of the month, the EPA outlined a proposal to reduce sulfur in gasoline starting in 2017. That news knocked prices down 10% to 15% across the entire sector. As the month progressed, the Brent/WTI spread has narrowed as WTI prices gained compared to Brent prices. According to Platts:

Refiners, on the other hand, have been enjoying better refining margins because the domestic crudes they bought, Bakken and other US domestic crudes, have been trading at huge discounts to Brent but since mid-February, the differentials for US domestic crudes have improved, tracking the changes in the Brent-WTI spread.

As the discounts to U.S. domestic crude evaporate, industry players wonder how long before it starts to affect refining margins because any benefit arising from cheaper U.S. domestic crude is being eroded by transport cost, as rail accounts for more than 60% of Bakken crude moving out of North Dakota.
Concerning these two issues, my take is that any new EPA regulations are years away and the markets overreacted. The regulations are just a proposal and not necessarily going to go into effect. Second, even though the Brent/WTI spread has narrowed, the refiners are still making plenty of money. Here, I’ve identified four refiners that have a PEG ratio below 1, a forward P/E of less than ten, and a market cap greater than $5 billion. Even though there are other refiners, these are the 4 that best meet that criteria.

Phillips 66 (NYSE:PSX)

Dividend Yield: 2.00%
PEG Ratio: 0.70
Forward P/E: 8.88

Phillips 66 (NYSE:PSX) represents the downstream assets that ConocoPhillips (NYSE:COP) spun off last year. The company owns and operates 15 refineries with a net crude oil capacity of 2.2 million barrels per day, 10,000 retail stations, and 15,000 miles of pipe lines. Phillips 66 (NYSE:PSX) also has a 50% interest in a natural gas gatherer and processor and a 50% interest in Chevron Phillips Chemical Company.

Phillips 66 (NYSE:PSX) has been buying lower cost shale and oil sands crude. The refinery has been using its rail cars to transport Bakken crude to its refineries. Phillips 66 (NYSE:PSX) reported refinery margins of $13.94 a barrel in the first quarter, which was the best in the company’s history. In the second half of this year, Phillips 66 is spinning off its midstream assets into an MLP called Phillips 66 (NYSE:PSX) Partners. This spin-off will create further value for shareholders.