2014 Outlook: A new barbell – bullish refiners and XOM; XOM to Buy, MRO to Neutral
*A new barbell, of sorts: Refiners + XOM
As we look ahead to 2014, we remain bullish refiners given the potential for wide (and volatile)
Brent-WTI crude oil spreads. However, our outlook for domestic oils is increasingly mixed,
given major restructuring are mostly in the past and considering downside risks to oil prices.
*Macro: Brent (=/-) and Brent-WTI (+/=)
Brent oil (=/-): Our base-case forecasts remain unchanged at $106.5/bbl for 2014E and $100/bbl for 2015E-2017N. However we see downside risks given improved non-OPEC supply ex-NAM, the potential for MENA disruptions to ease, and concern over EM demand. We will closely monitor all three areas.
*Brent-WTI (+/=): We believe it is premature to
call for “saturation” of light crude oil throughout the United States in 2014, though the possibilityhas increased for the 2015-2016 time frame. We expect Brent-WTI spreads to remain wide and volatile around our $10/bbl normalized forecast in
coming years to the benefit of MidCon/Gulf Coast refiners that can process light crude oil.
*Top picks and ratings changes
We upgrade XOM to Buy and downgrade MRO to Neutral as we see greater risk-adjusted upside
in super majors at this time and prefer to add a defensive element to our list of top picks. Among domestic oils, we keep Buys on OXY and SU for idiosyncratic reasons.
*Our Buy-rated refiner favourites remain HFC (CL),
MPC, DK, WNR, ALDW, and NTI, all of which have MidCon or Gulf Coast exposure to light crude oil spreads.
*Updated estimates, target prices
We have updated 2013E-2017N EPS estimates and target prices for our integrated/domestic oils and refiners to reflect a 4Q2013 commodity price MTM and generally minor company-specific changes. Our base-case Brent oil deck is unchanged. We now forecast $10/bbl Brent-WTI for 2014E-2017N versus $7/$10/$10/$9 before. We are now 8%/9% above consensus for integrated/domestic oils in 2014E/2015E and 23%/18% above for C-Corp refiners, respectively.