Shares of oil refiners Phillips 66 (NYSE:PSX), HollyFrontier (NYSE:HFC), and PBF Energy (NYSE:PBF) lost more than one-quarter of their value in March, according to data provided by S&P Global Market Intelligence. That was more than twice the losses of the S&P 500, which was only down 12.5% for the month.
HollyFrontier and Phillips 66 saw modest drops compared to the rest of the refining industry, down just 27.2% and 28.3%, respectively. PBF, on the other hand, took a huge 68.4% hit. The overall downstream (refining and marketing) sector of the oil and gas industry, as measured by the S&P 500 Refining and Marketing Index was down 36.2% for the month.
The stock market hammered oil companies up and down the industry after OPEC+ talks broke down on March 6, prompting the primary two OPEC+ members, Saudi Arabia and Russia, to increase production. That flooded the global oil market with cheap crude and caused oil prices to lose about half of their value.
Ordinarily, oil refiners are somewhat insulated from price shocks like these, because refiners buy crude oil and then sell the refined products -- like fuel and petrochemicals -- that they manufacture from it. So cheaper oil can actually lead to better margins. All three refiners saw share-price drops of between 10.4% (Phillips 66) and 15.8% (HollyFrontier) in the wake of the oil price collapse. That was a much gentler decline than much of the rest of the industry.
Investors were more concerned with the coronavirus pandemic and its effects on refining. Many refiners had just released their fourth-quarter 2019 earnings, which showed that prices for refined products were down thanks to oversupply. When coronavirus concerns caused flights to be grounded across the globe and hundreds of millions of people to be confined to their homes instead of driving to work, demand for refined products fell, exacerbating the oversupply.
The shares of these three refiners actually fell further between March 10 and 12 (during the coronavirus-induced market drop) than they did between March 6 and 9 (during the oil price-induced drop). Between March 10 and 12, their shares declined between 18.6% (HollyFrontier) and 30.7% (PBF).
PBF performed so much worse than HollyFrontier and Phillips 66 because of concerns that the company might have to cut its dividend. At the beginning of March, not only was the company generating far less free cash flow than the comparably sized HollyFrontier, but it was paying a higher dividend yield (5.4%) than either HollyFrontier or the much-larger Phillips 66 (4% and 4.8%, respectively). It's also the only one of the three companies with a junk credit rating.
Those fears became a self-fulfilling prophecy. As PBF's price fell, its dividend yield rocketed to more than 20%: an unsustainable level for most companies, let alone a small company struggling in a difficult market environment. On March 30, PBF announced it was suspending its dividend. Shares fell 7.3% in response, since most of the effects were already baked into the price.
All three refiners have cut their capital expenditures for 2020 and have made changes to their operations. Phillips 66 has cut its 2020 capital budget by 18.6%, suspended share repurchases, and put several pipeline construction projects on hold. HollyFrontier is cutting capital expenditures by 15% and is currently running its refineries at just 70% of capacity. Meanwhile, in addition to suspending its dividend, PBF has trimmed its capital budget by 35%, cut executive pay in half and CEO pay by two-thirds, and arranged to quickly sell five hydrogen plants for $530 million.
Based on these updates and the relative strengths of their businesses, HollyFrontier and Phillips 66 look poised to weather the current low-demand environment fairly well. PBF, on the other hand, is a risky proposition even at its current price. However, with so much uncertainty surrounding the refining sector and the energy industry in general, investors should think carefully whether they want to buy in now or wait to see where we are in a month or two.