Oil Sector Outlook Remains Bullish With Refinery Stocks Leading: Consider PBF Energy

You might ask why a cannabis analyst is covering the energy sector. While cannabis markets are bearish, it is important to consider other sectors and their performance. The energy sector offers interesting opportunities through supply/demand cycles, while other sectors may undergo long-term volatility with little recovery. I have written about PBF Energy Inc. (NYSE:PBF) in other venues and have followed the company for the last three years, as well as the energy sector. I have rated PBF stock as a buy when it was trading around $20 per share.

The current play on energy sector volatility is recommended by a few different analysts on Seeking Alpha and other places. Let’s consider the bigger set up and then dive into PBF Energy’s financial and business performance. OPEC+ oil cuts are creating a catalyst for energy stocks. Oil refinery companies are expected to profit and continue experiencing high margins because of the cuts. Bank of America in particular recommends PBF Energy.

Some Seeking Alpha analysts have rated PBF Energy as a sell because of the likelihood of crack spreads coming down from its historical highs. I suggest that you read the sell argument and understand the risks in a long-term strategy. There is a possibility that the spreads will come down, but the questions remain of how much they will decrease.

Other analysts on Seeking Alpha recommend playing refinery stocks because crack spreads are predicted to remain high for the next year, then decrease. Motor gasoline and distillate fuel crack spreads are predicted to remain elevated for 2023. The EIA also predicts refinery output in America to slightly decrease due to maintenance across all U.S. refineries.

Outside of Seeking Alpha, analysts are also recommending PBF because of assumed elevated crack spreads through 2023, thus higher margins for refineries. I follow the trend and rate PBF Energy as a strong buy. These catalysts should remain at least until the end of Q2-2023, after which crack spreads may decrease or increase. If PBF Energy’s stock price up trends and strikes near $50 per share, then a 20%- 25% profit may be realized. I will discuss some caveats to this strategy, for instance if the Fed keeps hiking interest rates or if crude oil prices significantly change.

PBF Energy’s Financial Performance

PBF Energy oversees six large oil refineries and is considered one of the largest refinery companies in the U.S. The company refines crude oil and sells unbranded fuel, jet fuel, oil, feedstock, and lubricants. The company’s top products are gasoline and diesel fuel. PBF Energy has refinery facilities in Delaware, New Jersey, Ohio, Louisiana, and two facilities in California. Its overall production capacity is around 973K barrels per day.

PBF Energy reported remarkable financial performance for 2022 with increasing revenues, debt relief, free cash flow, and historical profit margins due to high crack spreads. The company used its cash rich environment to pay down debt, introduce a $0.20 per share dividend, and undergo a stock buyback program.

For PY2022, the company reported income from operations of $4.153 billion, representing a near 700% increase compared to 2021. The company’s adjusted fully converted net income for 2022 was $2.963 billion or $23.36 per share. Revenues and margins for 2022 were historically high for the company’s performance:

(source: Seeking Alpha.)

Part of the company’s performance was due to historically high crack spreads. The company provided the following averages in its report.

(source: PBF Q4-2022 Report.)

The company also reported an increase in production output for 2022, averaging 937.1 thousand barrels per day compared to 852.2 thousand barrels per day for 2021. The company forecasts production of 935-995 thousand barrels per day for 2023. The company expects to undergo critical maintenance of facilities during Q1-2023, which will decrease some output.

With output remaining about the same for 2023, the variables for the company’s future financial performance concern the continuation of elevated crack spreads along with the amount of demand for refined fuels. The price of crude is expected to remain high for the rest of the year, but it will experience some fluctuations.

The company reports its Q1-2023 results next month. The market consensus on Q1-2023 revenue is $8.44 billion and an EPS of $2.76 per share. The number represents a decrease from Q4-2022 and overall low since 2021. Market consensus for PY2023 revenue is $38.11 billion, which represents a decrease from 2022. An improvement in performance would show up as higher profit margins, thus having a dependency on higher or lower crack spreads.

Stock Price Movements

The company’s stock price has increased 54% over the last twelve months and 7.85% YTD. The stock price has rallied and approached the $50 price channel four times over the last year. It currently trades around $40 per share. The stock price has been trending upward over the last twelve months and momentum remains high.

Analysts have set street price targets between $42 and $74 per share. $53 per share is the medium price target. It is possible that the stock price will trade in these higher price channels in the near future. At the same time, the higher price channel would represent a new series of all-time highs for the stock price. It is unclear whether the price would stabilize at or above $50 per share.

Investment Strategy

The company and stock price are currently undervalued. The NTM Total EV / Revenue multiple is 0.15x. The stock price has room to grow and the greater market conditions in the energy sector are increasingly bullish. Past and current performance for the company seem very consistent and the company is likely to experience further growth.

It seems plausible, assuming conditions for the sector stay the same, that the company’s stock will continue its slow uptrend. A long-term investment at the current price would bring a 20-25% return, if the stock price nears $50 per share.

Stop loss must be considered for this investment strategy. If the stock hits or nears $50 per share, the investment may be sold for profit. The stock may not sustain the price channel for very long. If the stock price begins a new downtrend, due to Fed rate hikes or changing crude prices, then the strategy should be abandoned. Volatility in the market has been extreme over the last twelve months and oils stocks are no exception.

It is not completely clear what the demand will be in the coming months nor if the crack spread will remain elevated. The Q1 cycle is typically the lowest earning for energy stocks, but the higher price of crude and historically high crack spreads imply a better performance. The summer season usually brings a high demand for oil, which may continue the trend. At this point, energy sector performance during Q3-2023 is anyone’s guess. The conditions sustaining PBF’s stock price may change rapidly in response to geo-political destabilization or through extreme rate hikes.

Conclusion

The energy sector is experiencing bullish conditions due to the OPEC+ cut backs of crude oil production and the historical high price per barrel of the crack spread. Oil refineries stand to gain the most from the current conditions and are currently leading in the energy sector. Analysts have recommended PBF Energy as a good play for the current conditions. The company had excellent financial and business performance in 2022 and it expects similar performance in 2023.

PBF Energy Inc.’s stock price has been on a one-year uptrend, paralleling the company’s increasing valuation. If conditions stay the same for the next six months, then PBF Energy’s stock price should increase, possibly between 20 and 25%. I rate PBF Energy Inc. as a strong buy.