What happened
Shares of PBF Energy (PBF 0.49%) slumped in trade today, closing July 14 down nearly 11%. An analyst downgrade is largely to blame.
So what
The energy sector and oil stocks, in particular, have been red-hot this year thanks to surging crude oil prices. Not surprisingly, PBF shares more than doubled through the first six months of the year before cooling off this month despite oil prices staying firm. Its heavy debt load has been a lingering concern -- one that Wolfe Research believes could stymie the company's growth.
Image source: Getty Images.
In a note to investors, Wolfe Research analyst Sam Margolin downgraded PBF Energy stock to "underperform" with a price target of $10. Margolin believes the company must delever. He also believes the company may not be able to repay debt rapidly in the current commodity environment.
Margolin's concerns aren't unfounded. PBF Energy has humongous amounts of debt and among the worst balance sheets among oil refiners. As of the end of the first quarter, it had total debt worth nearly $4.7 billion but held only around $1.5 billion in cash and cash equivalents, and generated negative cash from operations during the quarter.
Now what
To be fair, upstream oil companies are hit the hardest hit when oil prices fall, and PBF Energy wasn't the only oil refiner that had to suspend part of production last year during the oil market rout. However, companies with a stronger balance sheet are better placed to ride out the cyclicality in sectors like oil, and that's where PBF Energy might falter.
PBF Energy investors may now want to see the company take concrete steps to prevent further cash burn and pare down debt to make the most of the strong oil markets, so its upcoming second-quarter earnings report at the end of July is worth watching out for. Until then, there are better oil stocks to consider as oil prices rally.
