Is It Time to Buy This Under-the-Radar Refiner?

I've been following refining outfit PBF Energy (NYSE: PBF  ) pretty closely since its IPO in December. I'll be very honest: I like this company. However, its fourth-quarter earnings were an incomplete picture, given it had spent all of two weeks as a public company, and I've been waiting for its first-quarter results to see how public status is treating PBF, and how it is faring in the market overall. Today I'll look at how things panned out, and whether or not this refiner is all it's cracked up to be. (There will be no more refining puns.)

Q1 results
PBF reported strong first-quarter results, including a dramatic turnaround in operating income. The refiner recorded $100 million, compared to a loss of $164 million last year. Adjusted net income came in at $46.7 million, compared to a loss of $122.6 million in 2012.

Despite this, management was still disappointed in earnings, citing down-time at its Toledo facility because of a fire as one reason, and the rising cost of ethanol credits as another. PBF estimated the drag on EBITDA from these two factors was more than $90 million.

The other important thing to note, obviously, is margin. Gross margin averaged $9.13 per barrel, breaking out by region to $19.50 per mid-continent barrel and $5.14 per East Coast barrel. The East Coast market is known to be the bane of the refining industry, and we can see that clearly when we compare Valero's (NYSE: VLO  ) higher system-wide average price of $10.59 per barrel.

PBF even had a higher mid-continent price per barrel than Valero, who recorded $17.41, but it was not enough to overcome the East Coast price. For the record, both companies were blown away by mid-continent refiner HollyFrontier (NYSE: HFC  ) , which recorded gross margin of $23.32 per barrel.

Looking ahead
PBF anticipates doubling its budgeted spending on those troublesome ethanol credits, known as RINS, from $60 million to $120 million, but it also expects to recoup a significant portion of that in higher fuel costs. That is more or less a non-issue as far as I'm concerned. What I am more focused on is the East Coast margin story, so let's take a closer look at that.

PBF delivered an average of 17,000 barrels per day of Canadian heavy crude by rail in the first quarter, and 38,000 barrels of Bakken crude, totaling 55,000 barrels per day via rail. The Bakken deliveries have already increased to 70,000 bpd, and second-quarter deliveries should reach 80,000 bpd, before hitting 100,000 bpd by the end of the year. Similarly, the Canadian crude volumes are expected to reach 24,000 bpd in the second quarter, before hitting 80,000 bpd by the end of the first quarter of 2014.

This is huge, and higher volumes of cheaper crude will go a long way toward driving up gross margin per East Coast barrel. Management is expecting improved results from East Coast operations in the second quarter.

Buy or watch?
There are external factors that affect PBF that investors can't know or control, like oil prices, but there really is a lot to like about the future of PBF Energy, including the increase of domestic feedstock at its East Coast refineries, and the fact that PBF is ramping up its export game. The refiner expects to consistently ship 20,000-25,000 bpd of middle distillate to foreign markets. One last thing to keep in your back pocket: PBF is exploring the potential for a midstream spin-off, which could result in yet another revenue stream, as well as an additional investment opportunity for those who love master limited partnerships.

Given all of this, I would say at the very least PBF Energy presents an incredibly intriguing opportunity right now, and interested investors should get cracking on their research.

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