Oil refiners lead BofA's energy sector outlook with strong Q1 results expected

It's the "golden age of refining," with U.S. oil refiners (CRAK) poised to report their "best first quarter ever," Bank of America analysts said Thursday, raising their Q1 earnings per share estimates for the sector by 9% on average thanks to a strong finish for crack spreads.

"We find a single trend for all names under coverage: record 1Q23 earnings for what is normally the lowest seasonal earnings of the year and a set-up we see potentially supporting continued strength in the run up to the driving season," according to the analysts led by Doug Leggate.

Refined products have posted the highest seasonal demand in five years, and absolute demand for gasoline and jet fuel has surged to the strongest since the start of the pandemic, BofA said.

Distillate demand has been soft - not surprising given weak economic indicators - but jet fuel demand now stands at the highest since COVID, and gasoline shows the tightest inventory levels, 7% below year-ago levels for the aggregate U.S., BofA said in its report.

"As U.S. refiners produce nearly twice as much gasoline as diesel, stronger gasoline cracks are incrementally positive for the group," BofA wrote.

Valero Energy (NYSE:VLO) is the bank's top pick in the sector, with Valero and PBF Energy (NYSE:PBF) enjoying "the best leverage to a robust refining environment," while Marathon Petroleum (NYSE:MPC) "offers the most robust buyback program in Energy with more than a third of shares repurchased since 2021 [and] no slowdown in sight."

Refiner stocks have racked up strong gains during the past year, although they pulled back this week after OPEC+ surprised markets with more production cuts.