Amid geopolitical tensions in the Middle East, Jefferies analysts have highlighted oil levered companies that have underperformed, and therefore are attractively priced.
In recent developments, Iran launched an estimated 181 ballistic missiles at Israel last Tuesday, prompting speculation about the potential consequences, with expectations that Israel will respond.
Historically, energy investors have tended to overlook unrest in the Middle East, as disruptions to crude oil infrastructure are typically short-lived, the analysts noted.
Global spare capacity in both the upstream and downstream should also mute price responses.
“The current consensus is near-term escalation and intermediate-term calming. However, the right tail does exist now,” they wrote in a note to clients.
Further, concerns about potential regional contagion and impacts on the Strait of Hormuz, through which approximately 15 million to 16 million barrels of oil and 5 million barrels of products pass daily, remain.
In terms of oil-levered, attractively priced laggards, the analysts pointed to Northern Oil and Gas (small-cap), Civitas Resources and Ovintiv (mid-caps), ConocoPhillips (NYSE:COP, ETR:YCP) (large cap), Cenovus Energy Inc (TSX:CVE) (Canadian oil sands and refining firm), Schlumberger Limited (oilfield services firm), BP PLC (LSE:BP.) (Europe) and ARC Resources (Canadian small-mid cap).
Ahead of Q3 earnings, the analysts also projected refiners are expected to experience lower utilization and margin capture compared to Q2.
Utilization rates are projected to decline from the high 90% range in Q2 but remain above 90%.
For Valero Energy Corp (NYSE:VLO), the estimated earnings before interest, taxes, deprecation and amortization (EBITDA) and earnings per share (EPS) are around $1.24 billion and $1.06, respectively, versus the consensus of approximately $1.45 billion and $1.66.
This decrease is attributed to lower margin capture due to secondary unit turnarounds in the Gulf Coast, Mid-Continent, and West Coast.
Additionally, Valero is expected to reduce buybacks temporarily to about $600 million, focusing on cash distribution beyond free cash flow generation.
Marathon Petroleum Corp (NYSE:MPC) is anticipated to report EBITDA and EPS of $2.23 billion and $1.07, respectively, compared to the consensus of $2.6 billion and $2.05.
Midstream operations are expected to partially offset sequential declines in refining margins, with buybacks projected at $2.1 billion against an organic free cash flow of $1 billion for Q3, leveraging approximately $8.5 billion in cash and equivalents.
Phillips 66 (NYSE:PSX) is expected to post EBITDA and EPS of around $1.86 billion and $1.52, respectively, versus the consensus of approximately $1.99 billion and $1.95.
The projected utilization for Phillips is around 93%, influenced by discretionary maintenance tied to margins.
Positive results are anticipated for the chemicals segment, with High-Density Polyethylene (HDPE) margins up approximately $0.07 quarter-over-quarter, which may help offset challenges in renewable fuels as Phillips continues to optimize its Rodeo facility following startup.