Refiners: Been Down So Long It Looks Like Up to Citi

Shares of refining stocks have had a tough week–so tough that Citigroup picked today to become more bullish on the group and upgrading HollyFrontier (HFC) and Marathon Petroleum (MPC).

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How bad has this week been? Marathon Petroleum has fallen 4.3% through yesterday’s close, while HollyFrontier has dropped 2.5%, Valero Energy (VLO) has declined 3.5% and Alon USA Partners (ALDW) has slipped 5.7%. Western Refining (WNR) has weathered the selling and has ticked down just 0.3%.

Citigroup’s Faisel Khan and Mohit Bhardwaj explain why they’re feeling more bullish in the face of those loses:

Expectations appear low for US refiners. 2Q’14 EPS revisions, uncertainty on what 3Q’14 will bring, a slower pace of refining closures in the Atlantic basin, new product exports out of the Middle East and Russia, low distillate margins and the specter of US oil exports all seem to be weighing on the sector. Despite these headwinds, we are moving to a more bullish view, although we admit August and September tend to be “sloppy” months for US refining stocks.

Our optimism is based on a few key factors: 1) US and Canadian oil production continue to grow with volumes predominantly targeted for the US Gulf Coast; 2) Oil prices appear sticky with the continued volatility in the Middle East; 3) Oil price differentials in the US appear somewhat contained ($5-$10 per barrel) for now with the release of certain processed condensate and increased volumes of US crude to Canada. We view the current balance between producer net backs and refining feedstock discounts at a constructive level. 4) Lastly, we believe it is only a matter of time before we make more headway on refining closures in the Atlantic basin.

As a result, Khan and Bhardwaj upgraded Marathon Petroleum to Buy from Neutral–noting that “the market underappreciates Marathon Petroleum’s earnings power following a number of acquisitions, new initiatives in the midstream and pipeline business, and >$3.0bn in share repurchases over the last 2 years.”

Khan and Bhardwaj also upgraded Holly Frontier to Neutral from Sell on valuation, though they lowered its price target to $40 from $42 and noted that they “believe the stock could continue to have downside at current levels.” They downgraded Alon USA Partners to Neutral as they “believe Midland-Cushing differentials have peaked.”

Their favorite stocks–Valero Energy and Western Refining–remain unchanged. They like Valero because they see “crude-on-crude competition on the US Gulf Coast resulting in greater feedstock discounts at Valero’s high conversion refineries…” Western Refining gets the nod for “its restructuring potential.”

Shares of Valero Energy have gained 0.2% to $49.33 at 9:41 a.m. today, while Marathon Petroleum has risen 1.3% to $78.41, Western Refining has ticked up 0.1% to $39.70, HollyFrontier has advanced 0.2% to $43.19 and Alon USA Partners has dropped 2.4% to $16.61.