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PSX or VLO: Which Company's Likely to Win the IMO 2020 Race?

All eyes are currently on the downstream energy business as the International Maritime Organization (IMO) 2020 approaches. IMO intends to lower the sulfur content in marine fuels to reduce pollution from vessels. As such, we run a comparative analysis of two refining and marketing majors, namely Phillips 66 PSX and Valero Energy Corp. VLO, and see how these large-cap companies stand in terms of internal strength.

IMO 2020 & Its Effect on Refiners

IMO has decided to curb the amount of sulfur in marine fuels to 0.5% by 2020 from the current cap of 3.5%. The new rule is expected to bring in a sea change at refineries in terms of operations and configurations. While simple refineries are expected to suffer initially from the change, complex and larger refineries like Phillips 66 and Valero can reap profits from the decision.

Now let’s delve into these companies’ strengths.

Phillips 66 is one of the leading players in refining and chemicals businesses in terms of size, efficiency and strength. The company, which owns interest in 13 refineries located in the United States and Europe, has a global refining capacity of 2.2 million barrels of crude oil per day (BPD). It is well positioned for the upcoming change in regulations, given its updated refining assets.

Among all independent refiners, Valero offers the most extended refinery base, with a capacity of 3.1 million BPD, in its 15 refineries located throughout the United States, Canada and the Caribbean. More importantly, Valero is best positioned to reap profits from increased refining margins, mainly due to its strategic refinery structure that enables it to use cheaper oil from shale plays closer to its refineries.

A similar situation can be noticed in its Canadian refining operations, which receives crude from nearby oilfields at a discounted rate. Being a producer of a significant amount of distillate fuel, Valero is likely to gain from the change in regulations.

While both the companies are well positioned for the upcoming IMO 2020, Phillips 66’s distillate production — as a percentage of total throughput — is 38.2%, much higher than Valero’s 32%. Both the Zacks Rank #3 (Hold) companies are enriching their refining and midstream games with more investments. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

As it can be seen, in terms of total refining capacity, Valero stands ahead of Phillips 66 in the race for reaping profit from IMO 2020. However, Phillips 66’s distillate production — as a percentage of total throughput — surpassed Valero’s, making its operations more profitable and lucrative. Not only higher distillate production rate, but also Phillips 66’s diversified portfolio with significant midstream exposure is appreciable, as it reduces risk from concentration of revenue sources.  

Price Performance

Shares of Phillips 66 and Valero have gained 16.5% and 13% in the year-to-date period against the industry’s 1% decline.


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