US Refiners Poised For Sharp Increase In Profitability In Q2; Valero Preferred Pick: Citi

Analyst Faisel Khan of Citi mentions, “US refiners are poised to show a sharp increase in profitability for 2Q after four quarters in a row of losses. With stocks in the refining sector still trading below book value and the refining asset sale market burgeoning with inventory, there is clearly some skepticism in the market on whether refiners can make their cost of capital in the long-run. We believe the industry can meet its cost of capital within the next 18 months.”

“Our capacity addition model continues to show an increase in global utilization over the next two years, which we believe supports our thesis for a continued improvement in refining margins. We estimate overall demand & refining closures will more than offset new capacity additions resulting in global utilization growing from 82% last year to 85% next year,” the analyst says.

“We estimate gasoline demand will grow through 2011 after-which we will see a multi-year decline into 2020 by about 0.5 mmbls/day. We believe market expectations are for a much larger decline in demand… Year-to-date, US exports of refined products are up 50% over the last two years. Exports are up 10% over last year. We believe this is a secular growth trend for the US industry and not simply a result of unplanned outages in South America,” Citi adds.

“Valero continues to be our preferred pick in the sector. A strong balance sheet ($1.8 bn in cash), a complex US Gulf Coast refining fleet with the ability to export product to the Americas & Europe and a relatively cheap valuation make VLO our preferred pick,” the analyst states.

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