PBF Energy’s Assets Trading Well Below Fair Value; Multiple Catalysts Ahead

Executive Summary
PBF Energy (PBF) is a bargain at current market prices. PBF’s adept management team, in conjunction with private equity partners, acquired its core refining assets at fire sale prices in 2010 and 2011. Among these assets are the Paulsboro and Delaware City refineries which, following initial turnarounds, are now the crown-jewels of the East Coast (PADD 1) refining system. East Coast refineries have historically lacked the structural advantages of their Mid-Continent and Gulf-Coast counterparts. However, management’s aggressive investment program in a “crude-by-rail” logistical infrastructure promises to close the gap by adding much lacking optionality through access to cost advantaged crudes. Although the ownership structure has legacy problems and the company will undoubtedly continue to face cyclical margin and secular regulatory issues, the stock is much too cheap. A discounted cash flow analysis and an economic book value analysis convergingly indicate that the stock is fairly valued at around $50 per share (about 60% higher than current prices of about $31/share). Continue reading

VLO Is Conservatively Valued

Summary

  • Valero (VLO) is conservatively valued on an absolute basis according to a Discounted Cash Flow Analysis.
  • VLO is conservatively valued on a relative valuation basis against its peers group.
  • Conservative valuation reflects expected margin contraction. Even though analysts’ 2015 earnings estimates are still biased high, ample margin of safety makes VLO a long-term HOLD.
  • If/when estimates do come down, VLO is a BUY on the dip.
  • Although good things are more likely to happen to conservatively valued stocks, a separate thesis is needed to indicate how management would unlock value.

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A Crash Course in Refining Fundamentals

Summary

  • Refiners make money by cracking crude oil throughputs into valued-added products (i.e., yields). Crack spreads are cyclical and volatile.
  • Refiners have adapted to margin volatility by engaging in derivatives contracts which off-set short and medium commodity price risks and by investing in assets which are able to process cost-advantaged crudes and optimize yields of higher value products.
  • Vertically integrated refiners are further able insulate themselves from commodity risks and exert more pricing power.
  • Ceteris parabus, long-term crack spreads will be upheld simply due to the fact that markets tend to value refining assets at or below their replacement costs (RCN).
  • Compliance and regulatory measures are a more serious threat to the long-term viability of domestic refiners since they often elicit unintended economic consequences.

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