Oppenheimer Issues Massive Upgrade To Refining Sector

Analysts at Oppenheimer said in a new research note that the more than five year outperformance of refining stocks will continue.

The analysts upgraded HollyFrontier Corp (NYSE: HFC), Marathon Petroleum Corp (NYSE: MPC), Phillips 66 (NYSE: PSX) and Tesoro Corporation (NYSE: TSO) to Outperform, while also reiterating Valero Energy Corporation (NYSE: VLO) at an Outperform.

Underscoring the upgrade and bullish outlook were "favorable" fundamentals, including a wide crude differential, low natural gas prices, and growing refined product exports.

Oppenheimer also said that refining "valuations remain attractive," even given "strong stock performance since 2010." With these companies buying back shares, reducing debt, and growing dividends, the analysts argued that those valuations could extend further.

In the note, the analysts forecast a Brent-WTI differential that would fluctuate between $4 and $8, calling that a "huge competitive advantage to US refiners with processing flexibility." Also benefiting refiners is the low cost of natural gas, which is used as an input in many refining operations. So long as prices remain below $4/mcf, Oppenheimer said that this tailwind will persist.

Those two factors, according to the analysts, combined to form a major macro trend behind the shift that enabled the US to become the world's largest exporter of refined products.

This year, Valero and Tesoro have performed the best among these names, gaining roughly 20 percent. Marathon, Phillips and HollyFrontier have all gained more than 10 percent as well. This compares to a 2.2 percent increase in the S&P 500.