What happened
Shares of oil refiners Phillips 66 (PSX +0.54%), PBF Energy (PBF 0.10%), and ConocoPhillips (COP +0.66%) jumped on Wednesday, closing the day up 4.2%, 10.8%, and 4.9%, respectively, after trading even higher today.
Reports of a long-awaited update coming soon from the Environmental Protection Agency that could boost downstream oil refiners' margins pumped up the oil stocks, although investors in ConocoPhillips had even bigger reasons to cheer.
So what
The EPA's Renewable Fuel Standard (RFS) mandates oil refiners to blend renewables like ethanol and biodiesel into their gasoline, diesel, and jet fuel. Refiners that are unable to meet the annual renewable volume obligation (RVO) specified by the EPA have an option to buy tradable renewable fuel credits -- dubbed RINs -- on the open market.
However, the EPA hasn't yet laid down the RVO for 2021, which has forced refiners to continue following last year's RVO mandate and buy RINs even though their prices have risen manifold in the past year. That's only added to refiners' woes at a time when rising oil prices have already squeezed margins. Refiners typically benefit from lower oil prices as crude oil is their key raw material, which they then process into refined products. PBF Energy's management has been particularly vocal about RFS, calling it a "broken program."
So it was no surprise that a crucial update from Reuters this morning sent refining stocks soaring.
Image source: Getty Images.
The EPA is reportedly proposing big multiyear cuts to biofuel mandates for 2020, 2021, and 2022, according to a document seen by Reuters. It could potentially fix RVO at 17.1 billion gallons for 2020 (providing immediate relief to refiners), and 18.6 billion gallons for 2021, as per Reuters, which is considerably lower than the 20.1 billion gallons finalized for 2020 before the coronavirus struck. The document further says the 2022 level could be around 20.8 billion gallons.
Remember, though, that the EPA could still take until the end of November to finalize RVO levels, so oil refining stocks rising on this news is nothing but speculation for now.
Except for ConocoPhillips shares, which are rising for legit reasons.
In fact, it's turning out to be a particularly exciting week for investors in ConocoPhillips. In a massive development on Monday, the oil giant announced it'll buy Royal Dutch Shell's assets in the Permian Basin for $9.5 billion in cash, making it one of the largest shale deals in recent history. With this deal, ConocoPhillips has also put to rest concerns about why it was sitting on such a huge cash pile.
Yesterday, at least two analysts raised their price targets on ConocoPhillips stock, including Credit Suisse with a price target of $80 a share, and Truist with a target of $84.
ConocoPhillips expects the acquisition to add $1.9 billion in free cash flow in 2022. It also plans to dispose of some of the assets it acquires to raise an incremental $2 billion by 2023 (over and above its previous disposition target of $2 billion to $3 billion) and use the proceeds to repay debt and reward shareholders.
For that matter, ConocoPhillips also announced a 7% dividend increase on Sept. 20 and yields 3.1% currently.
Now what
A cut in RVO could trigger analyst upgrades on stocks like PBF Energy, although as I said, betting on these stocks now based on the EPA's upcoming decision is speculation.
The one stock that still excites me, though, is ConocoPhillips. I have been pounding the table for some months that it's one of the best oil stocks you could buy and hold, and I'm only glad to see the company now becoming the second-largest producer in the Permian Basin.
