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18 November 2008
Global Refining Efficiency
The mega-bear case for '09 oil
Paul Sankey
Research Analyst
(+1) 212 250-6137
paul.sankey@db.com
Ryan Todd
Associate Analyst
(+1) 212 250-8529
ryan.todd@db.com
New refineries use less crude oil
In this note we highlight why there is downside to our already-negative headline
view on oil in '09, based on a huge overhang of new, more efficient, refining
capacity addition into an already-oversupplied market. We outline a potential need
for OPEC to cut 2.5mb/d of production (DB core view 1.5mb/d cut). We believe
that cash production cost "floors" for the oil price are a shrinking target (lower
costs, stronger US$), which imply a "V" shaped downside to $40/bbl crude around
April '09. Cut SUN to SELL on exposure to global refining & high relative valuation.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at http://gm.db.com or by calling 1-877-
208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
Forecast change
Top picks
Alon USA (ALJ.N),USD7.69 Hold
CVR Energy (CVI.N),USD3.93 Buy
Delek US (DK.N),USD4.63 Hold
Frontier Oil (FTO.N),USD10.95 Buy
Companies featured
Alon USA (ALJ.N),USD7.69 Hold
2007A 2008E 2009E
EPS (USD) 2.11 -1.43 1.40
P/E (x) 16.4 – 5.5
EV/EBITDA (x) 8.6 – 4.2
CVR Energy (CVI.N),USD3.93 Buy
2006A 2007E 2008E
EPS (USD) 1.11 -0.45 1.67
P/E (x) – – 2.4
EV/EBITDA (x) – 2.9 1.7
Delek US (DK.N),USD4.63 Hold
2007A 2008E 2009E
EPS (USD) 1.85 0.59 1.18
P/E (x) 11.9 7.8 3.9
EV/EBITDA (x) 6.5 2.5 1.9
Frontier Oil (FTO.N),USD10.95 Buy
2007A 2008E 2009E
EPS (USD) 3.80 0.89 3.32
P/E (x) 10.0 12.3 3.3
EV/EBITDA (x) 5.0 1.6 1.1
Sunoco (SUN.N),USD25.63 Sell
2007A 2008E 2009E
EPS (USD) 6.90 4.72 4.22
P/E (x) 10.3 5.4 6.1
EV/EBITDA (x) 4.8 3.0 2.7
Tesoro Corporation (TSO.N),USD9.69 Hold
2007A 2008E 2009E
EPS (USD) 4.05 2.91 2.72
P/E (x) 12.6 3.3 3.6
EV/EBITDA (x) 6.6 2.4 2.3
Valero Energy (VLO.N),USD17.92 Hold
2007A 2008E 2009E
EPS (USD) 8.17 4.59 3.76
P/E (x) 8.2 3.9 4.8
EV/EBITDA (x) 5.1 2.6 3.0
Western Refining Inc (WNR.N),USD5.68 Hold
2007A 2008E 2009E
EPS (USD) 3.53 0.56 0.88
P/E (x) 11.3 10.1 6.5
EV/EBITDA (x) 8.8 5.6 5.6
Holly Corp. (HOC.N),USD17.01 Hold
2007A 2008E 2009E
EPS (USD) 5.98 2.03 2.34
P/E (x) 10.2 8.4 7.3
EV/EBITDA (x) 6.2 6.5 6.1
Global Markets Research Company
Weak refining is bad for crude prices
N.B. This report downgrades Sunoco to Sell and changes the PT of CVR Energy.
See pp. 3-4. The most underappreciated issue is the combination of poor demand
with major new refining capacity additions and the extent to which that will
undermine light sweet crude prices, such as WTI and Brent. There is an excess of
light material, notably condensate, on strong production growth over 2009, an
excess of its cousin product naphtha, and a severe excess of new refining
capacity: we see 2mb/d of capacity growth hitting a -500mb/d+ decline in
demand, with downside to our demand view. The new capacity is more efficient,
using ~20% less crude for every barrel of gasoline and distillate produced; this will
have a material impact on global crude demand.
And from there it gets worse: more supply and less demand
The need to shut down refining capacity is massively undermined by the sudden
jump in Chinese refining profitability. Fixed prices for products now stand far
above collapsed prices for crude oil. This will incentivise, not shut down, refining
in China. However we expect Chinese economic growth in 2009 of just 7.5%,
implying just 3.2% oil product demand growth. We believe Saudi will move
cautiously to crude price action; their task will be made more difficult by sustained
growth in non-conventional oil supply, e.g., mandated ethanol in the US and nonquota-
restricted condensate from OPEC itself. We are also very conservative on
Non-OPEC conventional oil supply growth even though our companies, led by
Petrobras and Chevron, are expecting strong growth. Based on company
forecasts, non-OPEC supply growth in 2009 should be a banner year, but our
forecasts are conservative. Given the weak demand we see vs relatively healthy
supply levels, we seek the cash break-even cost of marginal production as the
floor for oil prices. But this is a shrinking target. As oil falls, costs falls, the US$
strengthens, further causing local (Canadian, Russian) break-evens to fall. Also,
OPEC members are incentivised not to cut because their revenues are falling from
lower oil prices. A long term oil supply problem is likely; wecsee a “U-shaped”
economic outlook (long hard recession) that will not prevent a “V-shaped” crude
price curve (oil price sharply down rebounding sharply on accelerating decline
rates as marginal oil production capex is cut back). Our only concern with this
argument, given our conviction on the oil supply problem, is that it is consensus.
Risk on SUN is cold winter, a new CEO and an upcoming analyst meeting
Our SUN price target is set on 8x $3.75 forecast ’09 earnings derived combining
bottom-up, net asset value (NAV) and top-down forward earnings + multiples.
With the asset market weak, we pay more attention to EPS estimates, using 10x
annual EPS on ROCE/WACC implying 13x, less 30% volatility discount.
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