Investors Must Know: Can Downstream Still Outperform?
Cash flow analysis
The ratio of cash generated to cash required for the ten large capped refiners is 1.06x on an average basis in 3Q15. The refiners that have maintained these ratios for more than 1x in 3Q15 are Valero Energy (VLO), Marathon Petroleum (MPC), Tesoro (TSO), CVR Refining (CVRR), Delek US (DK), And Alon USA Energy (ALJ). The graph below illustrates the cash-generated-to-cash-required ratio as well as the price-to-cash-flow ratio of the large capped refiners.
Downstream companies were higher cash-capitalized compared to midstream and upstream peers in 3Q15. The cash flow from continuing operations for upstream and midstream has either diminished or is in negative territory. Moreover, the ratio measures the financial ability of the companies to serve their debt and expand the asset base without being caught in a vicious cycle of debt raising and refinancing.
Price and cash flow
Refiners HollyFrontier (HFC), PBF Energy (PBF), and Phillips 66 (PSX) have a relatively higher price-to-cash-flow ratio of around 11x, 9x, and 10x, respectively, compared to 6x, 5.3x, and 4.5x, respectively, for Delek US (DK), Alon USA Energy, and CVR Refining (CVRR), in 3Q15. The ratio measures the companies with higher cash flow per share. A Higher ratio indicates relatively low cash flows.
The price-to-cash-flow ratio of ExxonMobil is 8x in 3Q15. The company has a weight of around 16.4% in the Energy Select Sector SPDR Fund (XLE).
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