There is still room for total return gains in the high-yield refining sector, according to at least three sell-side analysts. Refiners make the bulk of their profits from gasoline sales during the summer driving season, and inventories look to be extremely low this year, says Gary Stromberg, an analyst at Bear Stearns. He also sees a drop in crude oil prices in the second half of the year, driving down costs for the refining industry.
Bear Stearns recently upgraded the sector to overweight from neutral, and Stromberg sees value in the Giant Industries 11% notes of '12 (B3/B-), which were bid at 85 last Tuesday and the Tesoro Petroleum 9.625% notes of '12 (B3/B) which were bid at 82. Stromberg sees both issues trading up to an 88 bid. He also likes the bonds of Frontier Oil (B2/B) and Premcor Inc. (Ba3/BB-).
Year-to-date through the end of February, the refining sector was up 7.2% versus 3.9% for the broader high-yield market, according to the Credit Suisse First Boston high-yield index II. Nonetheless, Adam Leight, analyst at CSFB, says that despite a weak January, margins for February were excellent. "These guys should've had a great month. Refiners historically make a lot of their first quarter in March. We've come in looking good. I still think some of this stuff is inexpensive relative to some of the other names in oil and gas," he says.
Christy Parsons, an analyst at CIBC World Markets, says she has recently stepped up her coverage of the sector because she began to see more value there than had historically been the case. Her top pick among the higher-rated names is the Citgo Petroleum 11.375% notes of '11 (Ba3/B+), which were bid at 101.625 last Wednesday. Among lower-rated issues, she favors the Tesoro 9.625% notes of '08 (B3/B) which were bid at 83.625. She says both issues should trade closer to Premcor, which saw its 9.5% notes of '13 bid at 104.625. She argues that Premcor's high leverage may make it vulnerable if margins falter.