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PBF Energy (PBF) Initiated At 'Hold' By Deutsche Bank

 January 22, 2013 01:21 PM

(By Balaseshan) Deutsche Bank analyst Paul Sankey initiated coverage of PBF Energy Inc. (NYSE: PBF), which operates as a refiner and supplier of petroleum products, with a "Hold" rating and $30 price target.

The analyst said U.S. East Coast refining, after European refining, could be described as a market where angels fear to tread. Both have high crude input costs, weak demand & excess capacity.

PBF Energy, chaired by refining legend Tom O'Malley, remembered for triumphs with Tosco & Premcor, less fondly for the struggle with European Petroplus, has established itself as a play on the extension of the US oil revolution into East Coast refining, Sankey noted.

Underpinned by a highly advantaged single Mid Con refinery, the next leg is to bring heavy Canadian crude by rail to Delaware, so revolutionizing crude costs. It makes sense, but the analyst is currently underweight refining on weak demand.

Sankey said PBF Energy owns & operates 3 combined capacity refineries of 540k b/d: East Coast Delaware City (190k b/d) and Paulsboro (180k b/d), both high-conversion heavy-sour), and MidCon Toledo (170k b/d), a light sweet high-value product slate play on booming MidCon oil supply.

That boom has prompted PBF to shift crude supply strategy to a crude-by-rail solution, with 110,000 b/d of rail infrastructure capacity being built by end of 1Q-2013, the analyst noted. The size of the Delaware refining site, with 5,000 acres, is seen as a unique competitive advantage to loop unit trains.

This will provide the East Coast plants with more rapid offload of discounted crudes such as Canadian bitumen, Sankey noted. The bizarre fact is that no experienced refiner would want to rail crude, as pipes and local supply matter more, conventionally.

However, the scale of discounts in North American oil allows the entrepreneurial, and PBF management move as fast as anyone, to take advantage of a structural, secular shift. The analyst's concern on U.S. refining right now is that demand is weak, and supply strong, so that without sufficient exports, gasoline may easily be so over-supplied that it wrecks overall margins.

If gasoline disconnects from international Brent pricing, and simply prices off local low-priced crudes, margins will be low, the analyst noted. The question will then become, and this is the key risk for PBF, how fast unprofitable Euro refineries shut down. The longer they keep running, the more the pain for all, and the analyst noted Delaware City has had a history of operational challenges.

PBF is trading up 0.88% at $28.75 on Tuesday.

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