Goldman Sachs' 3 Themes For Oil Refiners In 2H2015

Oil refiner stocks are outperforming the S&P by 21 percent and the XLE ETF by 29 percent in 2015.

Although upside seems quite limited now, analysts at Goldman Sachs think the second half of the year will be characterized by “dispersion, where company-specific, idiosyncratic leaders” like Valero Energy Corporation (NYSE: VLO), Marathon Petroleum Corp (NYSE: MPC) and Delek US Holdings, Inc. (NYSE: DK) will substantially outperform peers.

In a report issued Monday, analysts Neil Mehta, Kristina Cibor and Sam Schwartz look into three key themes for the second half of the year.

1) Buy the Gulf Coast

The firm continues to include Valero in its Americas Conviction List, maintaining a Buy rating and $79 price target. Another other large-cap refining company that operates in the U.S. Gulf Coast, which Goldman likes, is Marathon (Buy rating, $68 price target). The analysts see the equities in this region benefiting from sturdy gasoline margins, capital allocation, wider spreads and appealing valuations, going forward.

2) Own FCF machines

Delek (Buy rated, $47 price target) and Valero seem well positioned to deliver premium free cash flow on the back of capex declines. This would enable the companies to buy back more stock and increase its dividend yields.

3. Own SOTP leaders

On top of refiners, Goldman sees potential in some non-refining assets like at Delek’s Delek Logistics Partners LP (NYSE: DKL) and Marathon’s speedway and retail segments.

On top of the Delek upgrade, the analysts downgraded Phillips 66 (NYSE: PSX) from Buy to Neutral, to reflect the recent stock appreciation and expected margin pressure, and boosted Western Refining, Inc. (NYSE: WNR)’s rating from Sell to Neutral “to reflect midstream value,  M&A potential and strong Phoenix margins.”