Wells Fargo raises the caution flag on refiners, downgrades Valero, Marathon
Wells Fargo is less optimistic on the future performance of oil refinery stocks Analyst Roger Read downgraded both Valero Energy and Marathon Petroleum to equal weight from overweight. Read slashed Valero's price target by $25 to $135, which now reflects an upside of 5.2% from Monday's close. He cut Marathon's by $18 to $135, implying the stock could advance 4.4% over the next year. "We raise the caution flag on the refining sector," he said in a note to clients Tuesday. "Rapidly contracting diesel/jet cracks restrict the potential for near-term outperformance." The price per barrel of New York Harbor diesel cracks in the second quarter of this year has tumbled to a third of the $72 price seen in the fourth quarter of 2022. Meanwhile, jet cracks have also fallen, while gasoline remains seasonally strong. Read said that trend can be tied to factors such as a warmer winter, industrial recession or the lag effects of surging prices seen in 2022. As a result of the falling prices for crack spreads, the analyst reduced earnings per share estimates for the second quarter and full fiscal year across the board. These price changes imply the refinery sector will need to shift into "maximum gasoline mode" if it hasn't already, Read said. That's not ideal because a focus on gasoline means a shift away from a three-pillared business model to one with two pillars, which Read said is inherently less stable. To be sure, the inventory backdrop is still favorable. Gasoline inventory is well below levels a year ago, and the historical average, as shortages of octane and alkylates are likely to help summer 2023 demand. Diesel inventories are similarly below the historical average, though demand has cooled. Jet inventory, meanwhile, is "well above" where it was a year ago but still below the average levels seen historically. Demand has also recovered compared with the long-term average but still sits below levels seen before the pandemic. Crude supplies remain "robust" despite the surprise quota cuts from OPEC+, Read said. Though Read sees more limited upside for the stocks, both would be adding to advances seen this year and in 2022. Marathon has gained 11.1% this year after surging 82% in 2022. Valero has added 1.1% so far in 2023 after jumping 69% last year. MPC VLO 5Y mountain Valero and Marathon — CNBC's Michael Bloom contributed to this report.