4 Refining & Marketing Stocks to Watch as Margins Stay Tight

The Zacks Oil and Gas Refining & Marketing industry faces margin compression despite healthy fundamentals like tight refined product inventories and rising gasoline/diesel demand; macroeconomic concerns and regulatory uncertainty around renewable diesel are weighing on valuations. Despite a bearish near-term outlook indicated by a Zacks Industry Rank in the bottom 43%, U.S. refiners benefit from structural advantages, and companies like Marathon Petroleum (MPC), Phillips 66 (PSX), Valero Energy (VLO), and Galp Energia (GLPEY) are highlighted as potentially rewarding patient investors due to their strong assets and capital allocation.

Analysis

The U.S. Oil and Gas - Refining & Marketing industry is experiencing a dichotomy: while fundamental supply-demand dynamics appear robust with tight refined product inventories and increased demand for gasoline and diesel, refining margins have underperformed. This disconnect is attributed to macroeconomic anxieties, including potential economic slowdowns, and significant regulatory uncertainty, particularly concerning renewable diesel due to changes from the Blenders’ Tax Credit to the Production Tax Credit and unclear policy on California’s Low Carbon Fuel Standard. The industry's near-term outlook is challenged, as evidenced by its Zacks Industry Rank of #139 (bottom 43% of 245 industries) and a negative aggregate earnings outlook, with 2025 earnings estimates revised down by 38.3% and 2026 estimates by 19.7% over the past year. Reflecting this pessimism, the industry has underperformed the broader Zacks Oil - Energy Sector and the S&P 500 over the past year, declining 16.9% compared to the sector's 8.2% decrease and the S&P 500's 12.5% gain. Current valuation is low, with the industry trading at a trailing 12-month EV/EBITDA of 3.76X, significantly below the S&P 500’s 16.65X and the sector's 4.59X, and near its five-year median of 3.60X. Despite these headwinds, long-term fundamentals are constructive, supported by expectations of persistent global demand growth for refined products, an anticipated 800,000 barrels per day of capacity coming offline in the U.S. and Europe, and U.S. refiners' structural advantages like domestic crude access and low-cost inputs. Specific companies such as Marathon Petroleum (MPC), Phillips 66 (PSX), Valero Energy (VLO), and Galp Energia (GLPEY), all holding a Zacks Rank #3 (Hold), are noted for strong assets and smart capital allocation, although their shares have also declined over the past year (MPC -9%, PSX -19%, VLO -18%, GLPEY -25%). These firms have generally demonstrated positive earnings surprises, with MPC beating estimates in all four trailing quarters, and PSX, VLO, and GLPEY also showing strong average earnings surprises.

Key Decisions for Investors

• Investors should exercise caution in the near term due to prevailing margin compression, significant regulatory headwinds in renewable diesel, and negative earnings estimate revisions for the refining and marketing sector.
• Consider focusing on U.S. refiners with strong balance sheets, efficient operations, and disciplined capital allocation, such as Marathon Petroleum, Phillips 66, and Valero Energy, which may offer long-term value given their structural advantages and current depressed valuations, but acknowledge their recent stock underperformance.
• Closely monitor trends in refining margins, developments in renewable fuel policies, particularly California's LCFS, and broader macroeconomic indicators that could impact refined product demand and investor sentiment.
• Evaluate individual company performance, such as consistent earnings beats and cash flow generation, as differentiators within an industry facing overall pressure, but be mindful of the 'Hold' ratings and recent share price declines across highlighted stocks.