Mizuho Securities has recently adjusted its ratings for several U.S. refining companies, including Phillips 66, Delek US Holdings, and Par Pacific Holdings. The brokerage downgraded these companies from "outperform" to "neutral," citing that the recent surge in refining stocks has largely accounted for anticipated earnings increases. As a result, there is now only an average of about 4% potential upside according to the brokerage's updated price targets.
Despite the downgrade, Mizuho has increased its price targets for U.S. refiners by approximately 40% on average. This upward revision is based on higher and more sustained expectations for crack spreads, which represent the profit margin between crude oil and the refined products derived from it. Crack spreads are a crucial metric in the refining industry, as they indicate the difference between the cost of crude oil and the selling price of the products made from it, such as gasoline and diesel. Mizuho's projections now include a blended U.S. crack spread of around $42 per barrel in 2026, decreasing to about $34 in 2027, and further easing to approximately $28 from 2028 onwards. Previously, their long-term assumption was around $24.
The brokerage highlighted ongoing geopolitical tensions, such as the conflict in the Middle East and the Russia-Ukraine situation, as well as reduced global refining utilization, with Chinese exports being notably constrained. These factors have contributed to the current market dynamics, affecting supply and demand balances and influencing pricing strategies in the refining sector.
Refining stocks have experienced a significant increase of approximately 152% this year, compared to gains of about 42% for the Energy Select Sector SPDR Fund (XLE), 48% for the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), and 14% for the S&P 500 index. Mizuho noted that on a two-year forward basis, the group is trading at about 8.5 times enterprise value to EBITDA, which is nearly two standard deviations above its historical average of around 6.7 times. This valuation metric is a critical measure of a company's financial performance, as it provides insight into the company's ability to generate earnings before the influence of financing and accounting decisions.
For Phillips 66, Mizuho has raised the price target to $300 from $220, suggesting a potential upside of about 10%. The brokerage indicated that the current stock price already reflects much of the company's refining improvements and short-term earnings gains from higher crack spreads. Phillips 66 is a diversified energy manufacturing and logistics company, and its performance is closely tied to fluctuations in the refining margins.
The price target for Delek US has been increased to $83 from $66. The stock has surged over 150% this year, with small refinery exemptions already approved for 2025 acting as a significant catalyst, according to Mizuho. These exemptions are crucial for smaller refineries, as they provide relief from certain regulatory requirements, potentially enhancing profitability.
Par Pacific's target has been adjusted to $91 from $85, offering around 6% upside. Mizuho pointed out that the price adequately reflects expected earnings, while also noting the risk associated with Brent-linked crude supply at the company's Hawaii refinery. This supply chain risk is a critical consideration for Par Pacific, as it directly impacts the cost structure and profitability of its operations.
Mizuho has maintained "neutral" ratings for Valero Energy, Marathon Petroleum, HF Sinclair, and PBF Energy, with price targets set at $434, $457, $119, and $89, respectively. CVR Energy remains at an "underperform" rating with a target of $52, below its current share price of $57.38. These ratings reflect Mizuho's cautious stance on the sector amid current market conditions.
The brokerage suggests that further refining upside could be achieved through international oil companies, highlighting BP, which is rated "outperform" with a target of $56 compared to its $44.51 share price. This recommendation underscores the potential for global diversification in refining investments.
Mizuho anticipates that U.S. refineries will continue to operate at high capacity. U.S. refinery utilization reached a record 96.3% in the third quarter, while inventories of gasoline and diesel-type fuels remain near historically low levels. The brokerage estimates that capacity lost to maintenance will increase to nearly 7% in 2027 from about 5% in 2026, potentially sustaining elevated margins before they eventually decline. This high utilization rate indicates robust demand and operational efficiency within the industry.
Finally, Mizuho noted that its long-term view on crack spreads remains below futures prices, attributing this to limited trading in later-dated contracts. This discrepancy highlights the uncertainty and volatility inherent in the commodities market, particularly in the context of long-term price forecasting.
Footnotes:
- Mizuho Securities downgraded Phillips 66, Delek US Holdings, and Par Pacific Holdings to "neutral." Source.
- Mizuho increased price targets for U.S. refiners by about 40% on average. Source.
- Refining stocks have risen approximately 152% this year. Source.
- U.S. refinery utilization hit a record 96.3% in the third quarter. Source.
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